Insights

Third Quarter, 2024 Market Review

October 16, 2024

Dear Clients,

As we reflect on the third quarter of 2024, it’s clear that market volatility has drawn a lot of attention. From July through September, capital markets experienced notable fluctuations, with periods of negative performance followed by sharp rallies. Despite these swings, equities remained on a broadly positive trajectory.

Beneath the surface, key trends emerged that underscored the enduring value of diversification and the importance of maintaining a disciplined approach. Value stocks outperformed growth, small-cap stocks rallied, and international equities outpaced U.S. stocks in dollar terms. In the fixed income space, falling yields led to positive bond returns. As the Federal Reserve cuts rates and short-term bond yields continue to decline, it remains to be seen whether investors will shift their capital from money market funds back into equities.

This brings us to a central development this quarter – the Federal Reserve’s shift in monetary policy. In September, the Fed cut rates for the first time in over four years, reducing the federal funds rate by 0.50% to a range of 4.75% to 5.00%. This change marked a significant transition from tightening to a more accommodative stance, driven by evolving economic conditions.

Historically, markets often anticipate the Federal Reserve’s actions, as they continuously process information that may influence future decisions. The chart below demonstrates this by highlighting the movements in the treasury yield curve from the day before the rate cut to the close of the day after its announcement. The two lines are nearly identical on the short end of the curve, with only slight variations on the long end, indicating that the rate cut had largely already been priced in.

This observation highlights the Fed’s strong commitment to clear communication, which reduces the likelihood of market surprises. Consequently, it has become increasingly challenging for “Fed watchers” to achieve a consistent advantage based solely on Fed announcements.

Key Stats: Q3 Market Performance

Equity Market

• The U.S. stock market rebounded from an August selloff, ending the third quarter with a gain of 5.9%, as reflected by the S&P 500 index.
• While technology stocks faced challenges, MSCI U.S. small-cap value stocks surged 10.9% during the quarter, outperforming large-cap growth stocks by nearly 9%.
• Internationally, developed and emerging market equities also outperformed U.S. stocks, returning 7.3% and 8.7%, respectively, as represented by the MSCI EAFE and MSCI EM indices.

Bond Market

• Bond markets continued to rally in the third quarter as the outlook for interest rates and the likelihood of a soft landing for the economy solidified. Yields on the 10-year Treasury note fell from 4.48% at the beginning of July to 3.75% by the end of the quarter.
• The yield curve has normalized as bond yields declined. After more than two years of inversion, the yield on 2-year bonds dropped below that of 10-year bonds in early September.

Real Estate

• One of the top-performing asset classes in global markets during the third quarter was REITs, with the MSCI ACWI equity REIT Index returning 16.5%. REITs are particularly sensitive to interest rate changes and rallied as it became evident that the Fed would ease its monetary policy.

Final Thoughts

With the election just around the corner, it’s important to address the potential for election-related volatility. Historically, investors who maintain a long-term focus and resist the urge to make short-term, reactionary decisions based on political events tend to position themselves for greater success. The accompanying chart illustrates that staying fully invested during election periods has been the most effective strategy, irrespective of the political outcomes.

In conclusion, while the third quarter of 2024 presented various challenges and uncertainties, the fundamental principles of long-term, evidence-based investing remain as relevant as ever. By adhering to a disciplined and well-diversified approach, investors can navigate through short-term market fluctuations and stay focused on achieving their financial goals.

Thank you for your continued trust and partnership.

THE LOURDMURRAY TEAM

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