In the third quarter of 2024, U.S. stocks continued to build on a strong first half, with many market indices at or near record levels by quarter’s end. The quarter was punctuated by the Fed’s September 18th announcement of a much-anticipated cut in the federal funds rate, its first since the start of the COVID pandemic in March 2020. Investors have been intently watching inflation and economic data, trying to measure the timing and pace of a change in Fed policy from restrictive to an easing stance. By the time the Fed finally gained enough confidence in the economy’s disinflationary path, it has also had to contend with the recent evidence of a weakening jobs picture, thus justifying Fed Chair Powell’s decision to cut by 0.50% rather than 0.25%.
September is notorious for downside volatility, and this one appeared at times to be no different. However, after downturns in early August and again in early September, stocks rallied back to buck September trends and finish strong. Further, unlike recent quarters where AI-related/tech/Mag 7 stocks drove the market, investors were rewarded for patience in holding diversified portfolios. Small-cap equities outpaced large-caps, international equities outperformed their U.S. counterparts, and most notably, U.S. real estate (REITs) led the quarter, up an impressive 15.6%! The bond market also fared well with the Bloomberg U.S. Aggregate up 5.2%, boosted by Fed actions. Money markets and shorter-term fixed income securities still have relatively attractive yields, but they have been directly impacted by the Fed rate cut. Markets were pricing in two more cuts before the end of the year, but the last Labor Department report showed a more robust jobs report than expected fueling speculation about the size and scope of rate cuts going forward.
Index
3Q24 (04/01/24-06/30/24)
S&P 500 Index
5.9%
Russell 2000 Index
9.3%
MSCI EAFE Index
7.3%
MSCI Emerging Markets Index
8.7%
Dow Jones U.S. Select REIT Index
15.6%
Bloomberg US Aggregate Bond Index
0.1%
Source: YCHARTS
A Word on Mortgage Rates
Many recent and would-be homeowners have been waiting patiently for a change in Fed policy expecting rate reductions to result in lower mortgage rates. There is further supposition that this trend would continue as the Fed seeks its “neutral rate” thought to be a Fed Funds rate of approximately 3.5%. Yet, these expectations may prove to be illusive for new home buyers and those hoping to reduce their rates from recent peaks. Fed rate decisions are only one input in how the market sets mortgage rates. The 10-year Treasury rate is far more influential on mortgage rates, and it tends to fluctuate based on a myriad of economic information, such as inflation and trends in the labor market. It also responds to expectations and sentiment from the marketplace. For instance, mortgage rates peaked at 7.79% in October 2023, then fell to roughly 6.2% this September, despite the Fed holding the Fed Funds rate steady throughout this period of time. Conversely, since the Fed’s September rate cut, the 10-year Treasury has actually risen by 0.32%, and mortgage rates have followed suit. The so-called bond vigilantes, the collective of bond traders, influence longer-term rates over time as they seek to anticipate future economic activity, geopolitical trends, inflation, and the culmination of the Federal government’s burgeoning debt and perpetual budget deficits. The Fed has plenty of influential tools, including Fed Funds moves, quantitative easing, money supply dynamics, and others, but they do not seem to have much impact on mortgages rates at any given time.
All Eyes on November
Beyond Fed action during the quarter, there were several notable geopolitical events, domestic and abroad – assassination attempts, Presidential ticket changes, escalating Middle East conflict, the continued Russia/Ukraine war, the dock workers strike, and Hurricanes Helene and Milton. Our hearts go out to all those affected by the devastating storms that have punished people and property in an unusually large geographic area.
As if these circumstances were not enough to cause us anxiety, we are less than a month away from Election Day, leaving some investors wondering what will happen to the economy, the markets, and their lives.
One could argue the election of the President of the United States is one of the most important political events on the globe. As the leader of the free world, decisions made under our president could potentially impact global peace, security, or prosperity, so it is no wonder it receives the amount of scrutiny and angst that it does. But speaking strictly as investors, is there any strategy to employ or wisdom to be gained by studying election cycles to look for clues for managing outcomes?
No matter which poll you believe, the reality is both Vice President Harris and Former President Trump have a chance to be our next President, thus giving rise to much speculation as to how the economy and the markets will do under their respective term. As such, we want to address the issue of how election cycles affect markets and what, if anything, you might do about it.
There is a popular notion that the stock market will perform better with a Republican in the White House because they tend to be more pro-business. An equally popular notion is that Democrats—who tend to support higher taxes, and more regulation—hinder economic and market growth. However, historical evidence does not support either notion. Looking at the S&P 500 from 1961 (the start of John F. Kennedy’s term), we find that most presidential terms ended with a positive S&P 500. The only two Presidents that served over S&P 500 declines were Republicans, Richard Nixon, and George W. Bush.
This time is different
Every market cycle has its own unique characteristics, but they do tend to go through similar cycles over time. We are not suggesting that this market necessarily parallels any past market conditions, but the last time we observed the outsized returns of such a small segment of stocks was in the late nineties, or the dot-com era. As levered as it was at that time, its concentration of stocks in the S&P 500 Index pales in comparison to our present situation as evidenced by the following chart:
Looking again at the S&P 500 and combinations of parties in various branches of government since 1950, you still see mixed results, with the most profitable combination being a Democratic President with a mixed Congress.
Research around historical data on election cycles and market impact makes for interesting reading. However, it bears no actionable fruit in terms of prudent actions. Frankly, it seemed the more digging we did, the more confusing and contradictory the data became, which brought us to the most practical conclusion: Trying to predict the outcome of an election or positioning your portfolio according to historical patterns is simply another form of market timing, which most often has proven to be a fool’s errand.
The More Things Change…
Through all of life’s opportunities and challenges, it is our duty as your advisor to:
Keep you grounded in sound, disciplined planning and prudent investment advice
Not allow emotions to cause you to derail your plans
Help you remain agile in responding to varying circumstances as they arise
We are confident the future remains bright for those who prepare and stay disciplined and focused. At Wealth Dimensions, we are committed to this path for you and your families. As we move forward, you can expect us to continue to monitor your portfolios and adjust them to seek to reduce volatility or capitalize on future upside. On the tax front, we are staying abreast of the policies proposed by both candidates but are mindful that the path from campaign rhetoric to passable legislation is convoluted and somewhat unpredictable. That said, you can expect us to be ready with actionable strategies should current tax laws change. We welcome the opportunity to discuss these matters with you during the review process or at any time you see fit.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Quarterly Commentary: Third Quarter 2024
In the third quarter of 2024, U.S. stocks continued to build on a strong first half, with many market indices at or near record levels by quarter’s end. The quarter was punctuated by the Fed’s September 18th announcement of a much-anticipated cut in the federal funds rate, its first since the start of the COVID pandemic in March 2020. Investors have been intently watching inflation and economic data, trying to measure the timing and pace of a change in Fed policy from restrictive to an easing stance. By the time the Fed finally gained enough confidence in the economy’s disinflationary path, it has also had to contend with the recent evidence of a weakening jobs picture, thus justifying Fed Chair Powell’s decision to cut by 0.50% rather than 0.25%.
September is notorious for downside volatility, and this one appeared at times to be no different. However, after downturns in early August and again in early September, stocks rallied back to buck September trends and finish strong. Further, unlike recent quarters where AI-related/tech/Mag 7 stocks drove the market, investors were rewarded for patience in holding diversified portfolios. Small-cap equities outpaced large-caps, international equities outperformed their U.S. counterparts, and most notably, U.S. real estate (REITs) led the quarter, up an impressive 15.6%! The bond market also fared well with the Bloomberg U.S. Aggregate up 5.2%, boosted by Fed actions. Money markets and shorter-term fixed income securities still have relatively attractive yields, but they have been directly impacted by the Fed rate cut. Markets were pricing in two more cuts before the end of the year, but the last Labor Department report showed a more robust jobs report than expected fueling speculation about the size and scope of rate cuts going forward.
Source: YCHARTS
A Word on Mortgage Rates
Many recent and would-be homeowners have been waiting patiently for a change in Fed policy expecting rate reductions to result in lower mortgage rates. There is further supposition that this trend would continue as the Fed seeks its “neutral rate” thought to be a Fed Funds rate of approximately 3.5%. Yet, these expectations may prove to be illusive for new home buyers and those hoping to reduce their rates from recent peaks. Fed rate decisions are only one input in how the market sets mortgage rates. The 10-year Treasury rate is far more influential on mortgage rates, and it tends to fluctuate based on a myriad of economic information, such as inflation and trends in the labor market. It also responds to expectations and sentiment from the marketplace. For instance, mortgage rates peaked at 7.79% in October 2023, then fell to roughly 6.2% this September, despite the Fed holding the Fed Funds rate steady throughout this period of time. Conversely, since the Fed’s September rate cut, the 10-year Treasury has actually risen by 0.32%, and mortgage rates have followed suit. The so-called bond vigilantes, the collective of bond traders, influence longer-term rates over time as they seek to anticipate future economic activity, geopolitical trends, inflation, and the culmination of the Federal government’s burgeoning debt and perpetual budget deficits. The Fed has plenty of influential tools, including Fed Funds moves, quantitative easing, money supply dynamics, and others, but they do not seem to have much impact on mortgages rates at any given time.
All Eyes on November
Beyond Fed action during the quarter, there were several notable geopolitical events, domestic and abroad – assassination attempts, Presidential ticket changes, escalating Middle East conflict, the continued Russia/Ukraine war, the dock workers strike, and Hurricanes Helene and Milton. Our hearts go out to all those affected by the devastating storms that have punished people and property in an unusually large geographic area.
As if these circumstances were not enough to cause us anxiety, we are less than a month away from Election Day, leaving some investors wondering what will happen to the economy, the markets, and their lives.
One could argue the election of the President of the United States is one of the most important political events on the globe. As the leader of the free world, decisions made under our president could potentially impact global peace, security, or prosperity, so it is no wonder it receives the amount of scrutiny and angst that it does. But speaking strictly as investors, is there any strategy to employ or wisdom to be gained by studying election cycles to look for clues for managing outcomes?
No matter which poll you believe, the reality is both Vice President Harris and Former President Trump have a chance to be our next President, thus giving rise to much speculation as to how the economy and the markets will do under their respective term. As such, we want to address the issue of how election cycles affect markets and what, if anything, you might do about it.
There is a popular notion that the stock market will perform better with a Republican in the White House because they tend to be more pro-business. An equally popular notion is that Democrats—who tend to support higher taxes, and more regulation—hinder economic and market growth. However, historical evidence does not support either notion. Looking at the S&P 500 from 1961 (the start of John F. Kennedy’s term), we find that most presidential terms ended with a positive S&P 500. The only two Presidents that served over S&P 500 declines were Republicans, Richard Nixon, and George W. Bush.
This time is different
Every market cycle has its own unique characteristics, but they do tend to go through similar cycles over time. We are not suggesting that this market necessarily parallels any past market conditions, but the last time we observed the outsized returns of such a small segment of stocks was in the late nineties, or the dot-com era. As levered as it was at that time, its concentration of stocks in the S&P 500 Index pales in comparison to our present situation as evidenced by the following chart:
Looking again at the S&P 500 and combinations of parties in various branches of government since 1950, you still see mixed results, with the most profitable combination being a Democratic President with a mixed Congress.
Research around historical data on election cycles and market impact makes for interesting reading. However, it bears no actionable fruit in terms of prudent actions. Frankly, it seemed the more digging we did, the more confusing and contradictory the data became, which brought us to the most practical conclusion: Trying to predict the outcome of an election or positioning your portfolio according to historical patterns is simply another form of market timing, which most often has proven to be a fool’s errand.
The More Things Change…
Through all of life’s opportunities and challenges, it is our duty as your advisor to:
We are confident the future remains bright for those who prepare and stay disciplined and focused. At Wealth Dimensions, we are committed to this path for you and your families. As we move forward, you can expect us to continue to monitor your portfolios and adjust them to seek to reduce volatility or capitalize on future upside. On the tax front, we are staying abreast of the policies proposed by both candidates but are mindful that the path from campaign rhetoric to passable legislation is convoluted and somewhat unpredictable. That said, you can expect us to be ready with actionable strategies should current tax laws change. We welcome the opportunity to discuss these matters with you during the review process or at any time you see fit.
Thank you for your continued confidence in our services.
– The Wealth Dimensions Team
The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.
The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.
The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.