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The third quarter of 2024 saw a resilient stock market with positive performance across asset classes outside the bellwether Magnificent Seven, tech-heavy equities. The S&P 500 increased nearly 6% for the quarter and has delivered 41 all-time highs so far in 2024 (Source: S&P Global).
However, the market was not without bumps. Investors likely remember the steep declines experienced in August when the market fell 8% in just 14 trading days. In addition, Japan’s Nikkei Stock Average had its worst day since 1987 in August, falling 12% in a frenzy of selling triggered by disappointing economic data in the US and a surge in the Japanese yen (Source: Sellwood Consulting LLC).
The economy did not go into a recession in the third quarter, as GDP grew 3.2% as of October 9, 2024 (Source: Atlanta Fed). The unemployment rate ticked down for a second straight month, to 4.1% for the quarter, adding 254,000 jobs in September (Source: Bureau of Labor Statistics). While certainly positive news, manufacturing employment fell by 7,000 jobs and there is conflicting data on the health of the economy.
Recently, union workers at US ports went on strike, seeking higher wages. Though the strike is now resolved until January 2025, averting damaging supply issues in the near term, this strike shows the inevitable result of years of record-high inflation.
The Federal Reserve lowered interest rates by 50 basis points in September, a sign inflation is being better controlled, with the CPI rising 2.4% for the 12 months ending September (Source: Bureau of Labor Statistics), though less of a cooldown than economists were expecting. The interest rate reduction may also indicate that the Fed sees an economy and consumer in trouble, thus requiring a more significant rate cut. Time will tell when and by how much more interest rates come down.
Challenges do lie ahead. Americans are still showing signs of stress as car payment defaults have increased. Several consumer brands have warned of slowing demand. For example, Airbnb shares dropped 14%, missing earnings expectations; McDonald’s saw same-store sales fall 1% (Source: cnbc.com), and Nike stock was down more than 20% year to date with disappointing sales (Source: The Motley Fool).
Internationally, the People’s Bank of China recently announced a new stimulus package to help its ailing economy. In a single week, Chinese equities returned 21.2%, pushing emerging markets equities to among the strongest asset classes for the quarter (Source: Morningstar).
The upcoming US presidential election continues to be a potential source of market volatility, as will risks related to recent hurricanes and geopolitical events. As tensions in the Middle East have intensified, oil prices have also spiked. Roehl & Yi will keep a careful watch on developments affecting the US.
In our prior quarter MoneyMatters Market Update, Restrained Progress, Roehl & Yi suggested that bonds may be a wise investment. We have seen positive results as bonds delivered a strong performance in the third quarter, as discussed in this update.
MARKET RECAP
Stock Market
Market performance was impressive, with the S&P 500 up 5.89% for the quarter, the Russell 1000 large-cap value index up 9.43%, the Russell 1000 large-cap growth index up 3.19%, and the Russell 2000 small-cap index up 9.27%. Bonds also had a strong showing, with the Bloomberg US Aggregate Bond index up 5.20% and 10-year treasury bonds up 5.59%. Emerging markets stocks also performed well, up 8.72% (Source: Morningstar).
The table below is an overview of 2024 market performance for the quarter end, year to date, and a 2023 comparison.
*The MSCI EAFE Index is an equity index that captures large- and mid-cap representation across 21 Developed Markets and countries around the world, excluding the US and Canada.
Inflection Points Signal a Potentially Overzealous Market
The stock market has rallied 61% since reaching a low point on October 12, 2022. The current stock market price-to-earnings ratio of 21.5 aligns with the prior peak of 21.4 on January 3, 2022 (Source: JP Morgan).
S&P 500 Delivers Strongest Performance of the 21st Century
The S&P 500 posted a return of 22.08% in the first nine months of the year, the strongest start since 1997 (Source: Bloomberg). The grey bars in the chart below represent every year since 2000 and how performance compares to 2024.
After such an impressive rally, we have some concerns that the market has gotten ahead of itself. We would expect more volatility and advise investors to remain cautious and diversified going forward. That said, 2024 may be a good reminder that sticking to your long-term investment plan and avoiding market timing could reap long-term benefits. Very few experts were predicting the market to rise to these levels at the beginning of the year.
THE ECONOMY
September Delivers Strong Jobs Performance, Requiring Prudence
September jobs data suggest that the US might skirt deeper job losses. Employers added 254,000 jobs in September 2024, surpassing the 150,000 economists expected (Source: Wall Street Journal). We remain optimistic that these job gains will not need to be revised down, as occurred in August of 2024 (Source: Bureau of Labor Statistics).
Stretched Consumers See Higher Delinquency Rates
Consumers continue to look more financially stressed as many fell behind on loan payments. Roughly 8% of auto loan balances were newly delinquent in the second quarter, with payments at least 30 days late, and credit card delinquencies reached 9.1% (Source: Federal Reserve Bank of New York). Both percentages are the highest since the financial crisis of 2007.
ROEHL & YI’S FINAL THOUGHTS
While positive economic indicators are present, there remains considerable uncertainty about whether the US can achieve a “soft landing” and avoid a recession. It remains to be seen if the markets heed the warning signs.
Consider these suggestions:
- Rebalance back to your long-term strategic allocation. If you are overweight in stocks, the opportunity may be ripe to take some profits and add to your fixed income allocation.
- If you have significant investments in cash and short-duration fixed-income assets such as treasury bills and money market funds, now may be an excellent time to consider stretching duration and allocating some of those assets to core intermediate or municipal bonds.
- Keep enough cash on hand to meet your short-term goals.
- Think about adding international stocks to your portfolio if you are currently underweight in global assets.
- Adding exposure to tangible assets such as infrastructure or private real estate investments may be beneficial. These investments may offer the dual benefits of potentially holding up well amid prospects of slowing economic growth and weathering still-sticky inflation.
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This report is provided for informational purposes only. Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only and are believed to be reliable, but we take no responsibility as to their accuracy. The newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties, and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance. Any reference to the performance of securities of markets, indexes or specific investments is for illustrative purposes only and does not represent any of R&Y’s recommendations or performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from R&Y or the professional advisors of your choosing.