Fed Rate Cuts and Solid Earnings OvercomeRising Economic Anxiety

Quarterly Insights – October 2024

Markets were volatile in the third quarter as investors faced political turmoil and  increased uncertainty about future economic growth, but the return of Fed rate cuts  and solid corporate earnings helped to offset those political and economic anxieties, and the S&P 500 hit another new all-time high and finished the quarter with strong gains.  

Markets started the third quarter with a continuation of the first-half rally thanks to  good Q2 earnings results and generally solid economic data. However, while the S&P  500 hit a new all-time high in mid-July, the second half of the month proved more  volatile. That volatility was driven by an intense rotation within the S&P 500 from the  heavily weighted tech sector (more than 30% of the S&P 500) to other, smaller  market sectors such as utilities, financials and industrials. The impetus for this  dramatic rotation was a combination of profit taking following the substantial AI driven tech stock rally and a larger-than-expected decline in inflation which caused  Treasury bond yields to fall sharply as investors anticipated imminent rate cuts by  the Fed. That expectation boosted the economic outlook and caused investors to rotate towards market sectors that benefit more directly from a strong economy. So,  while investors didn’t exit the market entirely, the decline in the tech sector weighed  on the S&P 500 and was not fully offset by gains in other, smaller market sectors. The  S&P 500 finished July well off the mid-month highs and with just a small gain, up 1.1%. 

The late-July volatility continued in early August as a much-weaker-than-expected  July jobs report, released on August 2^nd, added to economic concerns. The  unemployment rate rose to the highest level since November 2021 and investors’ fear  of an economic hard landing triggered a sharp, intense decline that saw the S&P 500  fall 3% on Monday, August 5^th, the worst one-day selloff in nearly two years. However,  that decline proved brief as economic data over the next few weeks was generally  solid and that helped calm investors’ anxieties. Then, on August 23^rd, at the Kansas  City Fed’s Jackson Hole Economic Symposium, Fed Chair Powell told markets the  “time had come” for the Fed to cut rates. That all but guaranteed a rate cut at the  September meeting. That message further fueled the rebound in stocks and the S&P  500 finished August with a 2.3% gain, completing an impressive rebound from early month weakness.  

The rally continued in September thanks to growing expectations for a large Fed rate  cut that offset lackluster economic data. The August jobs report, released in early  September, was another disappointment and again increased concerns about an  economic slowdown and stocks were modestly volatile to start the month. However, following that report, numerous financial journalists and ex-Fed officials made public  calls for the Fed to cut interest rates by 50 basis points at the September meeting  and expectations for a larger-than-expected rate cut helped offset underwhelming  economic data and the S&P 500 hit a new all-time high ahead of the Fed decision.  Then, on September 18^th, the Fed met market expectations and cut rates for the first  time in four years and promised additional rate cuts between now and year-end.  Investors welcomed this news and the S&P 500 surged to a new high and finished the  month and quarter with more solid gains, adding to the strong year-to-date return. 

Finally, politics and the looming presidential election did impact markets during the  third quarter. Investors started the quarter expecting a Trump victory and Republican  control of Congress, based on polling following President Biden’s struggles at the  June debate and after the failed assassination attempt on the former president.  However, those expectations changed rapidly following Biden’s withdrawal from the  race and nomination of Vice President Kamala Harris. As the third quarter ended,  national polls slightly favored Harris while the outlook for the control of Congress  remained uncertain.  

Third Quarter Performance Review 

Investor expectations for falling interest rates and bond yields were the major  influences on index, sector and factor performance during the third quarter, as  markets were broadly positive but with some notable changes in leadership.  

Starting with market capitalization, small caps outperformed large caps for the first  time in 2024 as investors rotated out of large-cap stocks and into more  economically sensitive small caps, as they historically have received the most  benefit from lower borrowing costs that come with falling interest rates.  

From an investment style standpoint, value handily outperformed growth, although  both investment styles posted positive returns for the third quarter. The  outperformance of value was evidence of the significant rotation we saw from the  tech sector (which dominates most growth funds) to lower P/E and more  economically sensitive parts of the market such as financials, industrials, utilities and  others.  

On a sector level, nine of the 11 S&P 500 sectors finished the third quarter with a positive return and that continued the broad year-to-date rally we’ve all enjoyed. 

Evidence of the influence of lower yields on returns can be seen in the sector  outperformers, as utilities and real estate, two sectors that have relatively large  dividends and benefit when bond yields are falling, handily outperformed the  remaining nine S&P 500 sectors.  

Looking at sector laggards, the tech and energy sectors were the only sectors to  finish the third quarter with negative returns, as investors rotated out of tech and  towards those higher dividend and more cyclically sensitive sectors. Energy,  meanwhile, was the worst performing sector in the quarter as concerns about global  growth (especially in China) weighed on oil demand expectations.  

US Equity Indexes	Q3 Return	YTD
S&P 500	5.89%	22.08%
DJ Industrial Average	8.72%	13.93%
NASDAQ 100	2.12%	19.97%
S&P MidCap 400	6.94%	13.54%
Russell 2000	9.27%	11.17%

Source: YCharts 

Internationally, foreign markets outperformed the S&P 500 in the third quarter as the  relative underperformance of the tech sector was a headwind on S&P 500 returns.  Foreign developed markets saw a solid rally in the third quarter as investors  anticipated additional rate cuts from the European Central Bank and other major  global central banks. Emerging markets also outperformed the S&P 500 and foreign  developed markets as the Chinese government announced numerous stimulus 

measures late in September and that boosted Chinese stocks and emerging market  indices and ETFs.  

International Equity Indexes	Q3 Return	YTD
MSCI EAFE TR USD (Foreign Developed)	7.33%	13.50%
MSCI EM TR USD (Emerging Markets)	8.88%	17.24%
MSCI ACWI Ex USA TR USD (Foreign Dev & EM)	8.17%	14.70%

Source: YCharts 

Commodities were mixed, but in aggregate saw moderate losses in the third quarter  thanks mostly to weakness in oil prices. Oil declined sharply in Q3 as global demand  expectations were reduced courtesy of soft Chinese economic data early in the  quarter and on generalized global growth concerns. Gold, however, staged a strong  rally thanks to elevated geopolitical uncertainty and the weaker dollar, as gold hit a  new all-time high in Q3.  

Commodity Indexes	Q3 Return	YTD
S&P GSCI (Broad-Based  Commodities)	-5.26%	5.23%
S&P GSCI Crude Oil	-16.44%	-4.74%
GLD Gold Price	13.26%	27.53%

Source: YCharts/Koyfin.com

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) saw a very strong quarterly return thanks to a  combination of falling inflation, mixed U.S. economic data and as investor’s anticipation of an aggressive rate cutting cycle from the Fed.  

Looking deeper into the bond markets, longer duration bonds handily outperformed  those with shorter durations as investors reached for longer-term yield amidst falling  inflation and underwhelming labor market data. Shorter duration bonds also saw a  positive return, however, as investors anticipated the start of an aggressive rate cutting cycle by the Fed.  

Turning to the corporate bond market, investment grade bonds outperformed lower  quality “junk” bonds although both saw strong quarterly gains. For the first time in  2024, investors favored investment-grade bonds amidst increased economic  uncertainty, as investors sought the safety of higher-rated bonds over increased  yield.  

US Bond Indexes	Q3 Return	YTD
BBgBarc US Agg Bond	5.20%	4.45%
BbgBarc US T-Bill 1-3 Mon	1.36%	4.08%
ICE US T-Bond 7-10 Year	5.74%	4.26%
BbgBarc US MBS (Mortgage-backed)	5.53%	4.50%
BbgBarc Municipal	2.71%	2.30%
BbgBarc US Corporate Invest Grade	5.84%	5.32%
BbgBarc US Corporate High Yield	5.28%	8.00%

Source: YCharts

Fourth Quarter Market Outlook 

With the start of the Fed’s rate cutting cycle now behind us and the general pace of  future cuts now broadly known, focus for the final quarter of 2024 will turn towards  economic growth and politics. Given the volatile nature of both, it’s reasonable to  expect periods of elevated volatility over the coming months (but, as we saw in the  third quarter, markets can still move higher even amidst increased volatility).  

Starting with economic growth, expectations for aggressive Fed rate cuts helped  investors look past some soft economic reports in Q3, especially in the labor market. However, with those rate cuts now behind us, we should expect markets to be more  sensitive to any disappointing economic data, especially in the labor market. Bottom  line, with the S&P 500 just off record highs, the market has priced in a soft economic  landing, so if the economic data in Q4 is weaker than expected and recession fears  grow, that will increase market volatility between now and year-end.  

Politics, meanwhile, will become a more direct market influence as we approach the  November 5^th election. Depending on the expected and actual outcome, we could  see an increase in macro and microeconomic volatility that could impact the  broader markets as well as specific industries and sectors (e.g. oil and gas,  renewables, financials and others). That volatility will stem from the uncertainty  surrounding potential future policy changes (or lack thereof) towards important  financial and economic issues such as taxes, global trade and the long-term fiscal  health of the United States. 

Finally, geopolitical risks remain elevated and while the war between Russia and  Ukraine and the ongoing conflict between Israel, Hamas and now Hezbollah hasn’t  negatively impacted global markets this year, that’s always a possibility and these 

situations must be consistently monitored as the spread of these conflicts would  impact markets, regardless of any Fed rate cuts or election outcomes.  

In sum, as we start the fourth quarter the market does face economic, political and  geopolitical uncertainties. But market performance has been very strong in 2024; momentum remains decidedly positive, and this market has proven resilient  throughout the year. Additionally, current economic data is still pointing to a soft  economic landing. Finally, while political headlines may cause short-term investor  anxiety and volatility, market history is extremely clear: Over time, the S&P 500 has  consistently advanced regardless of which party controls the government and the  average annual performance of the S&P 500 is solidly positive in both Republican  and Democratic administrations.  

So, while there is elevated uncertainty between now and year-end and it’s  reasonable to expect an increase in short-term volatility, the fundamental underpinnings of this market remain broadly positive.  

At Trubee Wealth Advisors, we understand the risks facing both the markets and the  economy, and we are committed to helping you effectively navigate this investment environment. Successful investing is a marathon, not a sprint, and even bouts of  intense volatility are unlikely to alter a diversified approach set up to meet your long term investment goals. 

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline. 

We thank you for your ongoing confidence and trust. Please rest assured that our  entire team will remain dedicated to helping you accomplish your financial goals. 

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.