Market Commentary - October 2024

Economic Climate

In September, the Federal Reserve made a significant move by cutting interest rates by 0.5% (50 basis points), bringing the federal funds rate down to 5.00%. This was widely expected due to lower inflation and weaker-than-anticipated economic data. Inflation, which hit 9.1% in June 2022, dropped to 2.5% in August 2024, showing signs of cooling. However, recent reports point to a slower economy. For instance, the September ISM Manufacturing Index showed contraction at 47.2 (below 50 signals a shrinking industry), and home sales for both new and existing houses fell by 2.5% and 4.7% in August.

Additionally, geopolitical risks remain a concern. The conflict between Iran and Israel could potentially escalate, and a recent dockworker strike in the U.S. threatens to disrupt the supply chain, further slowing growth. Oh, and there's also the U.S. elections in November.

Stock Market Performance

The stock market has had a solid performance recently, with the S&P 500 reaching an all-time high at the end of September. Despite some minor fluctuations, the market continues to grow, with the S&P 500 posting a 36.33% return over the past year, largely driven by a handful of vey large companies. Tech stocks were the big winners, with the Information Technology sector up over 52%. Meanwhile, energy stocks struggled, with only a 0.79% increase. Other indexes, like the S&P MidCap 400 and SmallCap 600, also saw modest gains in September, reinforcing overall market strength.

One sector to keep an eye on in Q4 is Utilities, which saw a big jump of nearly 20% in Q3, driven by increasing demand for electricity. This is partly due to the growth of data centers housing artificial intelligence technologies, which require a significant amount of energy.

Bond Market Insights

In the bond market, the yield on the 10-year Treasury note ended September at 3.78%, down slightly from August. This decrease in yields typically benefits bond prices, which move in the opposite direction of yields. Investors should also note that the market expects more interest rate cuts from the Federal Reserve before the end of the year, possibly totaling 70 basis points. This could create opportunities in the bond market, but it’s important to stay tuned to economic and inflation reports, which could impact the Fed's decisions. The potential rate cuts in the near term could also delay capital expenditures and slow growth as companies and consumers hold off on big purchases hoping for better financing terms.

Key Takeaway

While the economy has shown some signs of slowing down, there are still reasons for optimism heading into the fourth quarter. U.S. household wealth hit a record $163.8 trillion in Q2 2024, and median household incomes grew by 4% last year. Additionally, new technologies and infrastructure investments are driving growth. Artificial intelligence spending is projected to double by 2028, and construction spending hit an all-time high in July.

For investors, Q4 offers a mix of potential challenges and opportunities. While geopolitical risks and economic uncertainty linger, strong stock market performance, booming technology sectors, and potential bond market opportunities suggest there’s still a lot to look forward to as we close out the year.