Market Monitor: September Update
Headlines and Highlights
- Markets post stellar quarter: Financial markets defied September’s record as the worst month of the year for stocks, rising across the board to cap a superb third quarter. The S&P 500 extended its winning streak to five months with a rise of 5.8% in the quarter and 22.0% for 2024, its best nine-month start to a year since 1997. Several asset classes surged during a period that saw the onset of interest-rate cuts in the United States and Europe. U.S. REITs rose 17.2% in the quarter, U.S. small caps 2%, emerging-markets stocks 7.7%, and international developed stocks 6.8%. U.S. taxable bonds added 5.2% as yields fell and prices rose.
- China unveils massive stimulus: China launched a barrage of stimulus measures aimed at boosting its flagging economy and stock market in the government’s response to a series of disappointing reports on jobs, spending and inflation. The country’s central bank cut interest rates, eased bank reserve requirements, and said it would offer $70 billion in loans to buy Chinese stocks. It also directed banks to lower mortgage rates for existing home loans. The government’s aggressive steps, long awaited, energized the Chinese stock market. The Hang Seng Index, which was flat for the year in early September, rocketed up 24% in the last three weeks. Historically, Chinese stimulus and credit expansion tends to bode well for U.S. stocks.
- Low inflation reading affirms Fed’s rate-cut decision: The Federal Reserve’s preferred measure of inflation, the PCE price index, fell to a 3½-year low of 2.2% in September, bolstering the Fed’s September 18th move to ease its crackdown on higher prices. Core PCE, which excludes food and energy, ticked up to 2.7% – evidence the Fed remains just short of its 2% target rate. Fed Chair Jerome Powell signaled that two more cuts of a quarter-percentage point are likely in 2024. He said this week that there is “growing confidence” that inflation will move sustainably down to 2% while the economy continues to grow moderately and the labor market remains healthy.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- We take Jerome Powell at his word that two quarter-point rate cuts are the likeliest scenario for the Fed’s remaining 2024 meetings in November and December. But we would not be surprised to see another large rate cut of half a percentage point at one of those meetings, as a slight majority of Fed futures traders expect, depending on the economic data. We expect the Fed to act aggressively on any sign of notable weakening in the labor market or economy.
- Inflation has a chance to reach the Fed’s 2% goal by early 2025 if the dockworkers’ strike is not protracted, easing the path for the Fed to keep steadily reducing interest rates toward 3%. Growth in housing rental prices has slowed and should result in lower readings for both the consumer price index (2.5% in August) and the PCE price index (2.2%) in coming months.
- The U.S. and world economies are in solid shape as the era of high interest rates starts the lengthy process of winding down to more normal levels. The U.S. economy expanded at an estimated annual rate of 2.5% in the third quarter, according to the Federal Reserve of Atlanta. And global economic growth should pick up next year as rates fall.
- Election-related uncertainty heightens the risk of market volatility between now and year-end, although given the healthy economy we expect any pullback to be short-lived. Historically, markets have performed well under both Democratic and Republican administrations. Since World War II, the S&P 500 has averaged 13.4% annual gains under Democratic presidents and 10.8% under Republican presidents (data through July 31st), as our recommended manager GW&K Investment Management noted this week.
- Increased geopolitical turmoil in the Middle East poses a new threat to the world economy, supply chain and markets. Over the long term, geopolitical crises have little impact on markets.
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