The broad stock market indices were up again in the third quarter. After being led by the trillion-dollar tech club for the first six months of the year, there was a rotation into small, mid-cap and value stocks in the third quarter of 2024. This is somewhat of a “reversion to the mean” as large tech stocks have led the market since the 2022 selloff.  It may also be due to the Federal Reserve starting on the path to lower rates with a half percentage point cut in the Federal Funds Rate at their September meeting. Small and mid-cap companies have been negatively impacted by higher interest rates as they affect discretionary consumer spending, and those companies tend to have relative more debt and often variable rate debt on their balance sheets.

The disparities between the performance of growth stocks (“COMP”) versus value stocks (“SVX”) and large capitalization stocks (“SPXTR”) versus mid (“IWR”) and small capitalization (“IWM”) stocks are highlighted in the table below:   

Symbol	Description	Quarter	Year-to-Date
		Ended 6/30/24	Ended 6/30/24
COMP	Nasdaq Composite	2.76%	21.85%
SPXTR	S&P 500 Total Return	5.93%	22.08%
SVX	S&P 500 – Citigroup Value Index	9.05%	15.36%
RSP	S&P 500 Equal Weight	9.48%	14.91%
IWR	Russell Mid-Cap Index	9.17%	14.48%
IWM	Russell 2000 Small-Cap Index	9.25%	11.02%

The third quarter saw some wild gyrations, especially the first few days of August where markets dropped precipitously after poor July labor statistics led to fears of a recession and volatility spiked to the highest level since the Covid pandemic shook world financial markets in March of 2020. As we enter the final quarter of the year, which includes the presidential election, we will likely see continued volatility, but it is hard to bet against a strong economy and a Federal Reserve that is lowering interest rates.

By all measures, the economy is firing on nearly all cylinders.  Labor markets are still strong, and inflation has come down significantly although it is still a major concern, especially housing affordability. Housing costs will hopefully be partially alleviated as mortgage rates come down further, but home insurance, if you can even get it, is getting increasing unaffordable for many. The latter factor plus a shortage of housing may keep housing costs elevated for the near future. The September employment numbers were so much stronger than anticipated that interest rates moved up meaningfully as traders now expect the Federal Reserve to slow the pace of rate decreases. The dual mandate of the Fed is to ensure full employment and stable inflation. The half a percent rate cut of the September meeting seemed to indicate that they were getting comfort on inflation and would have to turn their focus to employment. After the strong September labor reports, it now seems that neither labor nor inflation will torpedo the economy for at least the next few quarters.

We are now less than 30 days away from the U.S. presidential election and it is getting predictably nasty with each major-party candidate expressing dire fortunes for the country and world should the other be elected in November. As it relates to the economy, the President has only so much control as congress needs to pass on major legislation and budgetary items. Unless one party controls the presidency and both houses of congress, the wish-list of each candidate will be severely hamstrung. This is fortunate as both candidates are pandering to voters with budget-exploding policies in a time where the interest on the national debt is already larger that our military budget. The President does have more sway on trade policy as he can enact policy by Executive Order.  Both candidates understand that the stock market along with real estate have been the greatest wealth creators for the voting public and have tried to avoid saying anything that would spook the market. The economy is consistently the number one concern of voters and peoples’ retirement account balances play meaningfully into their thinking.

Given the financial media we consume is so focused on the U.S. economy and U.S. stock market, we sometimes forget that there are markets across the world and the global economy can affect the U.S. economy and vice-versa. Developed markets in Europe and emerging markets in Asia and South America have had periods where they have performed well. The last weeks of September saw an immense rally in Chinese stocks as the Chinese government intimated that they would be introducing a fiscal stimulus program, although some of that gain was given back over the last few days. European markets, which don’t have the technology weighting of U.S. markets, seem to be on steadier footing now that there is some rotation back into value stocks. Many investors seem concerned that the U.S. mega-cap stock rally had led to overvaluation relative to other segments of the market, both domestically and internationally, and therefore have been investing more of their money elsewhere.

Fixed income (bond) markets gained throughout the quarter as market participants awaited the September meeting where they expected the Federal Reserve to lower rates between 0.25% and 0.50%, the latter of which was the near unanimous rate cut selected by the Board members. Since the meeting and especially since the September labor report that came out in early October, bonds have been heading downward (yields rising). Investors now expect the pace of rate reductions to be slower than previously anticipated due to robust labor markets which indicate that the economy is still on strong footing and doesn’t need excessive stimulus in the form of meaningfully lower interest rates to boost spending.

Should you have any questions about this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve