WESCAP Q3 2024 Quarterly Commentary: Fed Rate Cuts and Global Growth
Portfolio results for the third quarter of 2024 were generally strong. The Federal Reserve cut interest rates by 0.5%, which was more than expected. Likewise, longer-term interest rates also declined. This helped asset pricing for longer-term fixed income assets and boosted most global stock prices, especially those that are more economically sensitive.
In our prior quarterly commentary, we cautioned that the largest mega-cap stocks, growth stocks and the S&P 500 would likely underperform “…other U.S. stocks, foreign stocks, and most other asset classes.” The S&P 1500 Growth Stock Index increased by 3.7% in the third quarter. Outperforming were the S&P 1500 Value Index and the Russell 2000 (small caps), gaining 9.1% and 9.3%, respectively over the quarter. The S&P 500 returned 5.9% over the quarter. The XLK (technology ETF) lost a fraction of a percent in the third quarter.
Emerging markets got a boost from Chinese stocks during the quarter, as China announced a slew of stimulus programs to help the economy, their moribund housing market, and financial markets. If more follows, as suggested by others within China, then this not only helps Chinese stocks, but also European, American, and other Asian multi-national firms, and boosts global growth. The MSCI Emerging Markets Index gained 8.7% over the quarter.
Fixed income performed well. The Bloomberg 20+ Year Treasury index gained 8.0% as longer-term interest rates declined. However, unless these rates decline further, future gains may be muted. 3-month T-bills had above 5% annualized yields over the quarter, but the Fed’s cutting of interest rates means these yields are likely to decline by close to 1% by year-end and by more in 2025. Money market yields are expected to decline in lock-step. Declining U.S. yields also have resulted in a weaker dollar, making non-dollar assets more attractive.
For now, the prospect of a U.S. recession and various foreign recessions appear to be receding while inflation continues its slowing. These are all favorable conditions for most financial and real assets in the short run. Nevertheless, the risk to labor markets, particularly in smaller businesses, has been increased by interest rates being as high as they have been for as long as they have. Did the Fed’s decision to cut interest rates come soon enough to save the economy from stalling out?
Lower interest rates, possible new government stimulus (no matter the November elections) and a rebound in non-U.S. economies may be enough to avoid a severe slowdown or recession. The October JOLTS report showed a slight increase in U.S. jobs available, a sign that labor markets are fine for now. However, we would be remiss in not considering a worse future outcome and being prepared for short-term economic and asset price declines.
As always, please feel free to contact your WESCAP advisor if you would like to discuss any of this further.