In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2024. Click here to go to the full report on our website. Following are the highlights:
- Equity markets continued to post gains in the third quarter of 2024, but with higher volatility than in the first half of the year. Uncertainty surrounding the election, interest rates, and global conflicts contributed to the market swings, as did a temporary shift away from the long-dominant Magnificent Seven tech giants which have dominated the market for the last several years.
- Despite this increased volatility, the overall trajectory of the markets remained positive in Q3 and for the year. The S&P 500 Index, the broadest measure of the stock market, posted a total return of 5.9% in Q3 and 22.1% year-to-date in 2024.
- Bonds also gained ground in the third quarter, with the Bloomberg Barclays Aggregate Bond Index posting a total return of 5.2%. For the year-to-date period through September, bonds were up 4.4%, reversing a negative total return from the first half of the year.
- The Federal Reserve lowered its benchmark Federal Funds rate by 50 basis points (one-half of 1%) on September 18th, in a move that surprised many market watchers who were expecting a more modest 25 basis point cut. But the Fed went big, citing a labor market that has slowed and an inflation rate that is moving sustainably toward its target of 2%.
- The U.S. economy maintained positive growth in the third quarter, although signs of a slowdown emerged. The labor market showed the most weakness through August 2024, though it surprised to the upside in September. Overall, the unemployment rate has risen over the last year to 4.1% in September from a cycle low of 3.5% in July 2023.
- On the inflation front, core inflation continues to decline toward the Fed’s 2% annual target. In August, core CPI was 2.5%, below the consensus forecast of 2.6% and well below July’s rate of 2.9%. The August reading was the smallest increase in inflation since February 2021 and significantly less than the peak of 9.1% in June 2022.
- Consumer-related data also remains robust, with consumer spending rising 2.8% in August and core retail sales up nearly 4% year-over-year. This helped U.S. GDP grow a healthy 3% in the second quarter, up from 1.3% in the first quarter. Consumer spending accounts for nearly 70% of U.S. GDP growth. For the third quarter of 2024, the Fed’s GDPNow model currently forecasts U.S. GDP to grow 2.5%.
- Corporate earnings also continue to grow. Third quarter S&P 500 earnings are projected to increase 4.6% year-over-year, which would mark the fifth consecutive quarter of earnings growth for the index.
- With November 5th fast approaching, we expect this highly charged and razor-thin Presidential race will continue to impact markets in the near term. But history has shown, over and over again, that elections do not drive markets over the long term. Instead, it is the underlying health of the economy, including corporate earnings, GDP growth, and interest rates that drive long-term market returns.
- It is our job as investment advisors to put the political noise aside and focus on the economic and business fundamentals of the securities we own. Our goal is to stay invested in high-quality companies and continue to look for new investment opportunities, remaining focused on fundamentals such as earnings, growth, and valuation.
- We are cautiously optimistic about U.S. stocks, despite lofty valuations. The forward price-to-earnings ratio for the S&P 500 is currently 21.4 times, higher than the five-year average of 19 times. But not all sectors or companies carry such high valuations, and we have been able to find pockets of opportunity in areas like energy, healthcare, and financials at substantially lower valuations.
- We believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.
The Edgemoor Team