Q3 2024 Market Update

Stock markets love an environment like this one. We have had mostly good news, with just enough worry to keep investors honest. While not perfect, markets were able to generate gains across the board during the quarter. In a sense, the third quarter mirrored the year as a whole and to some extent, reflects what we believe may be in store in the coming quarters. That is to say that we expect more of the same, steadily good markets with the odd hiccup here and there. During the quarter the Fed started an expected easing cycle, China unloaded a sizable stimulus package to boost their struggling markets, and we received some upward revisions to recent economic data. As always, there is an element of nuance to what is happening in the world, but our views have not changed substantially. We maintain a constructive view towards equities while believing in the relative value of short-term, high-quality fixed-income assets.

The big news for markets over the summer was the well-telegraphed turn in Fed policy, from a steady holding pattern to one in which they signaled the start of an easing cycle. This came to fruition in September with the first of what is expected to be several rate cuts. As of mid-October, markets are pricing a 0.25% rate cut at each of the next five Fed meetings, going out to May 2025. The fluctuations of inflation and labor markets are going to factor into Fed decisions, and with recent mixed inflation data and expected labor market distortions due to the very brief port strike and back- to-back hurricanes, it is anyone’s guess as to what the next month or two of data might look like.

Markets have been consistently too aggressive in pricing in lower rates, and to the extent that data remains unpredictable, investors may be ahead of themselves once again. After saying this, it is also worth pointing out that in our view, there is too much emphasis on the Fed and interest rates. Recent history has shown that the impact on the overall economy is overstated. Lower rates will help areas of the market but are unlikely to have a material impact on the economy, just as higher rates failed to ​derail the economic strength over the last two years. All else being equal, lower rates are a positive, particularly as global central banks are also in easing mode, they just are not as impactful as the constant focus would have us believe.

Speaking of easing, China has generally been out of the spotlight recently as many investors have moved away from the area altogether. However, in the last month, the Chinese government announced a stimulus package aimed at reviving the economy and interest in their markets. We have mixed feelings about this, as the size of various provisions are noteworthy but do little to remedy the structural challenges facing the world’s second-largest economy. In the short-term, there may be a tactical opportunity in Chinese stocks, though more interesting to us broadly speaking, any boost to the Chinese economy or stock markets is likely to filter through globally. In this sense, we view the stimulus as a positive catalyst. It is also worth noting that while a weakening economy has been disinflationary, if Chinese growth were to pick up, the opposite might be true. From a medium or long-term perspective, we remain highly skeptical about the effects of these measures. Little by little China is being squeezed from global export markets that facilitated its rise. At the same time, internal demand has dried up as the country faces dual demographic and debt crises. Although it is tempting to relay our experience investing in US markets to other places, history has shown us that there is no direct analog. For so many reasons we remain concerned that ultimately China could become another cautionary tale, even if things improve temporarily.

Focusing back on the US, this news came and went without much fanfare, but there were some notable revisions to recent economic data. In late September, the Bureau of Economic Analysis reported the revised information, which includes GDP, Gross Domestic Income (GDI), personal income, and savings. The new data shows that the second of the back-to- back quarters of negative GDP growth in 2022 did not happen. Instead, the economy eked out a small gain in Q2 2022. Overall, 2022 and 2023 GDP growth was revised higher by 0.6% and 0.4%, respectively. Meanwhile, GDI, which measures the economy from the income side, was revised higher by over 3.5% for the first half of this year. In turn, this resulted in a 1.9% upward revision in the recent saving rate data from 3.3% to 5.2%. These upward data revisions are
likely to result in an uptick in the 2.5% year-over-year productivity figure from Q2 of this year. We have discussed the importance of productivity in the past, as a more productive economy will help ease the burden of our own demographic and debt issues. These changes are particularly notable since we have been in a near constant tug of war between recession and no recession for over two years now. Those in the recession camp may now have to look elsewhere.

As we look ahead, the upcoming election is certainly an area of focus for investors. Although market movements in advance of the event have thus far been pleasantly orderly, we cannot rule out the possibility of some volatility. Whoever wins, we believe that markets will benefit from simply moving past the election, assuming we can without much delay. Both candidates bring their own unique set of pros and cons from an investing standpoint. A Trump presidency will likely see deregulation and emphasis on boosting the economy in the near term, while not necessarily considering the inflationary effects or long-term ramifications of policy. Meanwhile, Harris and team are likely to maintain some level of the status quo, with an emphasis on antitrust pursuits and trying to improve income inequality. As the new administration takes office in early 2025, the usual early policy push is likely to include taxes, and Congress will be heavily involved in determining what tax policy will look like after the latest round of tax cuts expires at the end of 2025. Neither candidate is likely to tackle the bigger issue around the national debt, as both are expected to increase deficit spending. Whatever the outcome, investors and markets will adjust, and life will go on, just as it has after every other election.

Collectively, the recent news and current outlook have us feeling reasonably good about stocks. The US economy continues to confound the skeptics, while innovation remains robust, and to some extent president-proof. Our outlook for fixed income remains mixed, as we do not see any major credit risks, however, current pricing has us less excited about taking those risks in the first place. Inflation remains tricky to predict, and volatility in the month-to-month readings is likely to continue to impact rates and bond markets. Over the coming months, the increase in liquidity is likely to be oxygen for markets, as the combination of lower rates globally and China throwing money at their problems provides a tailwind.

There is always a lot going on in the world, but a great deal of the disorder depicted in the endless news cycle is ultimately just noise. We are happy to report on how well markets continue to perform, and we are reasonably optimistic that it will continue, hopefully closing out 2024 on a positive note. Thank you as always and please contact us if you have any questions or concerns.

Index Descriptions:
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the USA.

The Russell 2000 Index is a stock market index that tracks roughly 2000 US small companies, and is considered a key benchmark for US small cap stocks.

The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 Developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.

The Bloomberg US Aggregate Bond Index, or the Agg, is a broad based, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the USA.

Disclosures:
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