Q3 2024 Review & Outlook
by Chris Broderick, Research and Trading Director
Fed Rate Cuts and Solid Earnings Overcome Rising Economic Anxiety
Markets began the third quarter with a continuation of the year-to-date rally thanks to good Q2 earnings results and generally solid economic data. However, while the S&P 500 hit a new all-time high in mid-July, the second half of the month proved more volatile, driven by a material rotation within the S&P 500 from the heavily weighted tech sector (>30%) to other, smaller market sectors such as utilities, financials, and industrials.
The impetus for this rotation was a combination of profit-taking following the outsized AI-driven tech stock rally in the first half of the year and a larger-than-expected decline in inflation. This decline in inflation caused Treasury bond yields to fall sharply as investors anticipated imminent rate cuts by the Fed. That expectation, in turn, boosted the economic outlook and caused investors to rotate towards market sectors that benefit more directly from a strong economy(1). So, while investors didn’t exit the market entirely, the intra-month decline in the tech sector weighed on the S&P 500, which finished well off the mid-month highs.
The late-July volatility continued in early August as a much-weaker-than-expected July jobs report released on August 2nd added to economic concerns. The unemployment rate rose to the highest level since November 2021, and investors’ fear of an economic hard landing triggered a sharp, intense decline that saw the S&P 500 fall 3% on Monday, August 5th(2).
Fortunately, that decline proved brief as economic data over the next few weeks was generally solid and calmed investors’ anxieties. Then, at the Kansas City Fed’s Jackson Hole Economic Symposium on August 23rd, Fed Chair Powell told markets the “time had come” for the Fed to cut rates, which all but guaranteed a rate cut at the September meeting(3). That message further fueled the stock rebound, and the S&P 500 finished August with solid gains.
Rolling into September, volatility returned early on as the August jobs report released at the beginning of the month was another disappointment and again increased concerns about an economic slowdown. However, following that report, numerous financial journalists and ex-Fed officials made public calls for the Fed to cut interest rates by 50 basis points at the September meeting, and expectations for a larger than previously expected rate cut helped offset underwhelming economic data(4). Then, on September 18th, the Fed met market expectations and cut rates for the first time in four years and promised additional rate cuts between now and year-end(5). Investors welcomed this news, and the S&P 500 surged to a new high and finished the month and quarter with more solid gains, adding to the strong year-to-date return.
With the start of the Fed’s rate-cutting cycle now behind us and the general pace of future cuts now broadly known, the focus for the final quarter of 2024 will turn towards economic growth and politics. Given the volatile nature of both, it’s reasonable to expect periods of elevated volatility over the coming months (but, as we saw in the third quarter, markets can still move higher even amidst increased volatility).
Starting with economic growth, expectations for aggressive Fed rate cuts helped investors look past some soft economic reports in Q3, especially in the labor market. However, with those rate cuts behind us, we expect markets to be more sensitive to disappointing economic data, especially in the labor market. With the S&P 500 just off record highs, the market has priced in a soft economic landing, so if the economic data in Q4 is weaker than expected and recession fears grow, that will increase market volatility between now and year-end(6).
Politics, meanwhile, will become a more direct market influence as we approach the November 5th election. Depending on the expected and actual outcome, we could see an increase in macro and microeconomic volatility that could impact the broader markets and specific industries and sectors. That volatility will stem from the uncertainty surrounding potential future policy changes (or lack thereof) regarding important financial and economic issues such as taxes, global trade, and the long-term fiscal health of the United States.
Finally, geopolitical risks remain elevated, and while the war between Russia and Ukraine and the ongoing conflict between Israel, Hamas, and now Hezbollah hasn’t negatively impacted global markets this year, that’s always a possibility, and these situations must be consistently monitored as the spread of these conflicts could impact markets independent of any Fed rate cuts or election outcomes.
As we start the fourth quarter, the market faces economic, political, and geopolitical uncertainties. However, market performance has been solid in 2024; momentum remains positive, and this market has proven resilient throughout the year. Additionally, current economic data is still pointing to a soft economic landing. Finally, while political headlines may cause short-term investor anxiety and volatility, market history is extremely clear: Over time, the S&P 500 has consistently advanced regardless of which party controls the government, and the average annual performance of the S&P 500 is solidly positive in both Republican and Democratic administrations(7).
So, while there is elevated uncertainty between now and year-end, and it’s reasonable to expect an increase in short-term volatility, the fundamental underpinnings of this market remain broadly positive. Thank you for your ongoing confidence and trust. Please do not hesitate to contact your advisor with any questions or comments or to schedule a portfolio review.
1 https://us.etrade.com/knowledge/library/perspectives/market-happenings/monthly-perspectives-august-2024; https://paralleladvisors.box.com/v/Q42024EconIndicatorsandReturns
2 https://www.theguardian.com/business/article/2024/aug/05/us-stock-market-recession-dow-close; https://paralleladvisors.box.com/v/Q42024EconIndicatorsandReturns
3 https://www.federalreserve.gov/newsevents/speech/powell20240823a.htm
4 https://www.reuters.com/markets/rates-bonds/sahm-rule-creator-sees-50-bps-fed-rate-cut-labor-market-worries-2024- 09-17/; https://www.bloomberg.com/opinion/articles/2024-09-16/the-fed-should-cut-50-basis-points-now-and-i-think-itwill; https://finance.yahoo.com/news/fed-faces-dilemma-over-25-004705670.html?
5 https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html
6 https://www.marketwatch.com/livecoverage/stock-market-today-dow-futures-eye-record-high-after-big-fed-ratecut/card/stocks-look-fairly-priced-at-record-levels-based-on-a-soft-landing-scenario-says-ameriprise-strategist8BIzDc8sGSqOzWmzuFSX; https://paralleladvisors.box.com/v/Q42024EconIndicatorsandReturns 7 https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-whenit-comes-to-your-investments
This material is provided for informational purposes only and should not be construed as investment advice. Different types of investments involve varying degrees of risk. Discussion or information contained in this presentation does not substitute personalized investment advice from Parallel or another professional advisor of your choosing. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of Parallel Advisors, LLC (“Parallel”). Parallel cannot and does not provide warranties nor representations as to the reliability or accuracy of the content it shares.