Market Recap

Global stock markets overcame a choppy third quarter to end with gains across the board. During the dog days of summer, market volatility spiked in response to underwhelming guidance from several tech giants, concerns of weaker economic data, and policy action from the Bank of Japan. Ultimately, market angst faded as the U.S. economy showed signs of re-accelerating and Q2 GDP growth was revised up to 3% driven by solid consumer spending.[1]

For the quarter, the U.S. stock market as measured by the S&P 500 rose 5.89%.[2] Global stocks as measured by the MSCI ACWI rose 6.6% for the quarter.[3] Beneath the surface, markets experienced a notable rotation out of mega-cap tech stocks like Nvidia and Microsoft, which dominated the first half of the year. This shift benefited value and smaller-cap stocks, leading to a healthier, broad market rally. The table highlights the outperformance of smaller-cap and value stocks during the third quarter.

All eyes were on the Federal Reserve, which began the much-anticipated easing cycle at their September meeting by cutting the fed funds rate by 0.50%. With the Fed’s formal policy shift, the share of global central banks in easing cycles crossed the 50% line. The chart below highlights how global stocks have historically performed when the majority of central banks are in easing cycles. On average, easing cycles have been positive for global stocks, rising by an average of 6% a year later and another 13% in the second year.

The notable shift in U.S. monetary policy during September drove one of the best quarters for U.S. bonds in years. Client portfolios benefited from our decision to further extend duration earlier this year in anticipation of the policy shift. Bonds as measured by the Bloomberg U.S. Aggregate Index rose 5.20% for the quarter and are up 11.57% over the past year.[4] Following the first rate cut in 4 years, bond yields fell sharply, particularly for longer-duration Treasuries. This marked a strong reversal from the higher rates seen throughout much of 2023 and early 2024. While the strong quarter was cheered by investors, it is humbling to note that the bond market has been in a bear market since late 2020 and remains in the longest drawdown in history. Looking forward as yields likely decline with subsequent Fed rate cuts, we remain bullish and believe the bond market offers investors the opportunity to lock in attractive levels of income and total return potential.

While we are encouraged to see an environment characterized by declining interest rates and a rally that has begun to extend to a broader cohort of stocks, the market performance over the past two years has been driven by a narrow leadership group. The concentration within the S&P 500 has surged to the highest level in decades and is now well above the peak of the internet tech bubble in 2000. The rapid rise in market concentration has highlighted the impressive corporate strength of a handful of tech companies that are at the forefront of growth and the AI euphoria. In fact, the “Magnificent 7” technology giants that encompass the top 10 index holdings have largely been responsible for the index’s gain over the past two years. As a result, the index will be highly sensitive to their performance going forward.

Current Positioning

We enter the final stretch of 2024 with our asset allocation framework favoring risk assets with a recognition of potential near-term volatility with all eyes on the Presidential election and the geopolitical landscape. Autumn pullbacks are typical during election years but are usually short-lived. We would expect that pattern to continue with the election just over a month away, followed by equities concluding the year higher.

The final months of the year should bring continued economic momentum, albeit at a slowing pace, a healthy labor market, inflation continuing to cool, and further Fed rate cuts. Household and corporate balance sheets are generally in good shape, helping to contain downside economic risks. Now, with the Fed pivot underway, financial conditions are far less of a headwind to growth. Slowing earnings growth in the mega-cap tech stocks should continue to support the healthy market rotation that began in the third quarter. Overall, it remains a favorable “goldilocks” environment for the U.S. economy to continue to navigate toward a soft landing with limited recession risk.

We would anticipate that any near-term choppiness should represent a buying opportunity, rather than the start of protracted market drawdown. Until the weight of the evidence suggests that the environment is changing, we remain overweight U.S. stocks and believe small & mid-cap stocks offer compelling value. An environment of broadening earnings growth, a resilient labor market, cooling inflation, and future interest rate cuts should provide a tailwind for diversified portfolios.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

New World Advisors, LLC ("New World") is a Registered Investment Advisor ("RIA") with the U.S. Securities and Exchange Commission (“SEC”). New World provides investment advisory and related services to clients nationally. New World will maintain all applicable notice filings, registrations and licenses as required by the SEC and various state regulators in which New World conducts business. New World renders individualized responses to persons in a particular state only after complying with all regulatory requirements or pursuant to an applicable state exemption or exclusion.

[1] Bureau of Economic Analysis

[2] Morningstar Direct

[3] Morningstar Direct

[4] Morningstar Direct

Q3 2024 Market Commentary