The Start of Something New
Third Quarter Market Summary
The third quarter felt very much like a roller-coaster ride. In July, the markets were riding high on the back of the AI craze, followed by recession fears that pulled markets down nearly 9% in early August, and rounding it all out with a Fed fueled rally in September.
US stocks finished Q3 up nearly 6%. We saw a healthy rotation and broadening of returns coming from Large Value, Small Growth, and Small Value companies. It was nice to see stocks higher without the leadership of the “Magnificent Seven”.
The 10-year Treasury yield rate dropped significantly in the third quarter. Starting the quarter at 4.47% and ending at 3.80%, resulting in the Bloomberg US Aggregate Index climbing 5.2%. During this time, the Federal Reserve cut short-term interest rates by 0.50%.
Below is a table highlighting various market index returns over the past 3, 12, and 36 months:
Commentary
The third quarter was the start of something new. We began to see the stock market broaden, inflation numbers continued to ease, the labor market maintained its strength, and the Federal Reserve cut interest rates for the first time since its rate hiking campaign began in 2022. The Fed’s most important message from its recent decision to cut rates by 0.50%, was that there is a strong shift from controlling inflation, to now focusing on full employment and supporting economic expansion. A pivotal moment indicating the Fed’s commitment to forward thinking, fostering stability, and avoiding an economic slowdown.
Source: J.P.Morgan
As you can see from the chart above, the market expects the Fed to continue cutting rates. What can history tell us about rate cutting cycles? Stocks and bonds tend to do well. Since 1980, five of the 10 best years for the S&P 500 happened when the Fed was cutting rates without a recession (1985, 1989, 1995, 1998, 2019). The Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. The market was higher one year later all 12 times (with a median return of 15%). For bonds, since 1970 high-quality bonds have outperformed cash by an average of 10% in cutting cycles. Cash is likely to underperform as yields fall.
For long-term investors, the opportunity to take advantage of this rate cutting cycle has come. Many have held onto oversized cash positions, where going forward, stocks and bonds may present better outcomes. Please reach out to review your asset allocation if you have any questions.
Political Showdown
As we approach the upcoming election, tensions are high, uncertainty peaks, and the thought of what could be in store over the next four years certainly can feel uneasy. Regardless of the party you support, these feelings are valid and the actions of the future leader of the country could meaningfully impact your day-to-day life.
Gratefully, when it comes to your investments, there is less emotion involved. Businesses have the ultimate goal of generating profits and increasing shareholder value. When policy changes, businesses strategically adjust and continue to march forward. This is one reason why capital markets trend higher over the long run, regardless of who is elected to run the country.
Markets are nonpartisan. The S&P 500 has historically averaged positive returns under nearly every partisan combination. Additionally, a divided government has historically correlated with better market returns, given potential gridlock and less policy uncertainty. See the chart below.
We believe that investment decisions should be based on you own personal financial goals and longer-term fundamentals – not near-term political outcomes.
Source: Fidelity
Our constant client message: remain persistent, invested, diversified, disciplined, and focused on the long haul!
"Be wise enough to learn from the past, shrewd enough to capitalize on the present, and clever enough to prepare for the future." — Matshona Dhliwayo
Enjoy the fall and upcoming holiday season!
JR Geld, CFA, CFP® HWA Financial Group
jgeld@hwafinancialgroup.com 3448 Ellicott Center Dr., STE 101
Ellicott City, MD 21043
Philip E. Huber, Jr, CPA, CFP® 410-696-4025
phuber@hwafinancialgroup.com
Danny Pereira, CFP®
dpereira@hwafinancialgroup.com