Q3 Report 2024 - The Stock Market Enters a Holding Pattern
Welcome to the first edition of the Quarterly Report from the Ely Clark & Associates Wealth Management team at Raymond James.
With the upcoming US election, many are curious about the potential market impact of a Republican or Democratic victory. Historically, market optimism tends to increase once election uncertainty is resolved. Since 1980, the S&P 500’s total return in the 12 months following a US election has surpassed the 40-year average of 12.1% in 7 out of 11 periods. Periods where returns fell short were typically due to economic disruptions such as the early 80s recession, the dot-com crash in 2001, and the slow recovery post-2008. The only other exception was after the 2004 election, where returns were still solid at around 9.4%. Given the anticipated soft landing for both the US and Canadian economies, historical trends suggest that reducing political uncertainty in the US generally has a positive effect on equity markets. Therefore, it’s crucial to stick to your long-term plan and avoid reacting to short-term market volatility.
The expectation for rates cuts by the Federal Reserve dominated the market’s focus for most of the third quarter just as it had in the first half of the year. However, the narrative switched from when these cuts would arrive – the September meeting became the de facto cut date long before it became official – to how much the Fed would reduce their Federal Funds target range. The odds gradually shifted from pricing in a 25-basis point cut to a more aggressive 50-basis point cut, and that is exactly what the Fed decided to do on September 19. The first rate cut since March of 2020 removed some of the uncertainty with respect to monetary policy, though the future path of additional cuts is still up in the air. It also remains to be seen if these cuts will, in fact, boost the slowing U.S. economy going forward. In light of the ambiguity surrounding the Fed and the forthcoming presidential election, the stock market largely entered a “wait and see” holding pattern for much of the third quarter, while more notable moves were seen in the bond and commodities markets.
Equities
The S&P 500 finished the third quarter with a respectable 5.53% gain, taking its year-to-date performance to an impressive 20.81%. Yet, that positive return belied what was, in actuality, a more turbulent, rangebound market for much of the July-September period. Practically all of the S&P 500’s gains came in the first 11 and final 8 sessions of the quarter. In between these bouts of progress was a sharp ~10% decline from mid-July into early-August and an almost two-month recovery that followed it. Meanwhile, other measures of the stock market, such as the tech-heavy NASDAQ 100 and the small cap Russell 2000 have still yet to eclipse their July highs. The lack of consistent progress across the broader stock market has made for a more difficult environment to navigate than earlier in the year, though stocks have nevertheless remained resilient.
Bonds
The bond market enjoyed a relatively smoother quarter. The anticipation of the Fed rate cuts dropped the yield on the benchmark 10-Year U.S. Treasury Note from 4.40% at the start of the quarter to a low around 3.60% in mid-September. This decline in rates accordingly boosted bond prices, which move inversely to rates. The Morningstar U.S. Core Bond Index gained 5.15% in the quarter and is now up 11.39% over the past 12 months, helping to insulate diversified investors from some of the rougher patches in the stock market. The reduction in rates may also help to ease some of the financial stress on companies and consumers by lowering borrowing costs. It is anticipated that short-term rates will fall further in the months to come as the Federal Reserve continues to cut, though it is less clear if this will result in a similar decline in longer-term rates since a “soft landing” in the economy may already be largely priced in. If inflation expectations reverse back to the upside as the economy enjoys a boost from the lower rates, we could see the longer end of the yield curve begin to creep up, potentially putting downward pressure on bond prices.
Commodities
Broad commodity indices were mostly down in the third quarter, though much of that loss was due to high exposure to the price of crude oil. West Texas Intermediate crude fell 18.73% and touched a low of $65 per barrel, continuing what has been a rangebound couple of years for the important commodity. WTI has mostly traded between $65 and $95 since late 2022 amid slowing demand in China and increased supply. The poor performance of oil did nothing to diminish the shine of gold, however, as the precious metal jumped more than 11% in the quarter to extend its gain to 28.4% so far in 2024. It has struck numerous new all-time highs this year, and silver also received a boost during August – September to touch its own highest level since 2012. The economically sensitive price of copper, on the other hand, was more muted during the third quarter, rising by around 3%.
Conclusion
Overall, it was another relatively quiet quarter for the financial markets even if there were some hiccups along the way. The stock and bond markets both enjoyed positive returns, while exposure to gold had the potential to further boost portfolios. The performance from stocks was particularly welcome considering it was the first positive September for the S&P 500 in five years. With the Federal Reserve finally cutting rates and entering accommodative mode once more, market attention will likely now shift to the upcoming presidential election next month. During election years, October has historically seen negative returns for the S&P 500, on average, since 1950, and according to technical analyst Ryan Detrick, October has also been negative 7 out of 9 times when the S&P 500 is up at least 20% year to date through September. On the bright side, the stock market does enjoy more positive seasonal tendencies in November and December, particularly in election years. In fact, strong stock performance has immediately followed the last two presidential elections in 2016 and 2020. These historical tendencies are no guarantee of future performance, of course, but they can help guide investors as the final quarter of the year unfolds.
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