Markets began the third quarter continuing their upward climb before reaching an all-time high on July 16th. However, a cooling economy and poor employment report had the market concerned about a recession, leading to a 9% drop over the ensuing 3 weeks. Negative sentiment peaked on August 5th when the Japanese stock market slid 12%, their largest single day decline since Black Monday in 1987.

Fortunately for investors, the sell-off in stocks was short-lived. Better economic data, stable inflation, and a 50-basis point cut in the Fed Funds Rate sent stocks into a rally, finishing the quarter at an all-time high.

Bonds had a great quarter, and investors welcomed a return of stocks and bonds being inversely correlated. During the three weeks stocks fell 9%, bonds rallied 2.1%, and finished the quarter up 5.2% as yields fell. Bond enthusiasts were excited to see Treasury 2-year vs 10-year become un-inverted for the first time since July 2022.

Price Action

The state of the economy (GDP, Employment data, Industrial Production, Corporate Earnings) seems to have finally overtaken the Federal Reserve as the biggest driver of markets. That said, monetary policy will be closely monitored as always. We began Q3 expecting two rate-cuts in 2024. We’ve already gotten that 0.50% drop and the market is now expecting two more quarter-point cuts for a total of four in 2024. The market is pricing in another 4 cuts in 2025. Interestingly, longer-term rates have actually risen 0.3% since the Fed’s September meeting.

The third quarter was one of redemption for relative underperformers in the market. Large technology companies were a relative underperformer with Nvidia (-1.7%), Microsoft (-3.6%), Amazon (-3.6%) and Google (-8.7%) all falling. Meanwhile, parts of the market that had struggled this year were the top performers.

  • Real Estate Investment Trusts (REITs) were the big winners in the quarter, rallying 16%.
  • Small-Cap Value Stocks did well domestically (+11.5%) and abroad (+9%).
  • Long-Dated Treasuries gained 10% but are still down 2.7% for the year.
  • International stocks edged US Stocks by a little over 1% on the quarter. The discrepancy in valuations has some forecasters expecting that trend to continue.
  • Commodities and stores of value splintered in Q3 with gold appreciating (+13%), while oil dropped significantly (-17%) and Bitcoin fell (-3%).
  • Housing prices continued to climb, gaining 1.5% for the last 3 months we have data.

Looking Forward

The election next month will draw headlines and likely be the biggest mover of markets in the next quarter. However, barring a significant policy change, the market will eventually shrug off the election noise and focus on the fundamentals that affect market prices.

Beyond the election, we have geopolitics, economic growth, and Fed Rate cuts all to watch in the coming months. Market valuations continue to be high relative to historical standards. It feels like there’s more room to move down than up.

Please enjoy the last betting chart of the year. After much turmoil in the last three months, the election is as close as it can be.