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Markets in Focus: US Stock Markets and Consumer Spending Remain Strong Ahead of Election

The third quarter had its ups and downs but overall continued the trend of positive market performance.

However, there are some risks to sustained market performance and economic growth.

Key Points:

  • Gross Domestic Product (GDP) growth rebounded from the first quarter’s weak number (1.6%) and increased to 3.0% in Q2 2024.
  • Equity markets weathered some volatility early in the quarter and rebounded to end the quarter with a modest gain.
  • The Federal Reserve began their highly anticipated rate cutting cycle with the first interest rate cut of 50bps in their September meeting.
  • The upcoming election brings uncertainty, but long-term history shows that the markets don’t really care which political party wins.
  • Employment and manufacturing data was mixed this quarter, but the US consumer still remains strong.

Market Recap

Global indices were mostly positive during the third quarter, though investors faced some volatility. A significant sell-off occurred in early August when a popular investment technique called a carry trade, involving the Japanese Yen, faltered, causing fear in equity markets. However, markets quickly recovered and continued to rise through the end of the quarter.

  • The S&P 500 finished the quarter up 5.8% and is now up 22.0% year-to-date.
  • International equity markets were also positive, with the MSCI All Country World Index ex USA returning 7.7% in the third quarter. However it’s still trailing the S&P 500 on a year-to-date basis at 13.8%.
  • Large-cap value stocks outperformed large-cap growth stocks during the quarter, as measured by the Russell 1000 Value Index (+9.4%) and the Russell 1000 Growth Index (+3.1%). However, the Growth index continues to outperform for the year so far, +24.3% vs. +16.5%.
  • Fixed-income markets fared well as markets anticipated the beginning of the rate-cutting cycle. The Bloomberg US Aggregate Bond Index gained 5.3% in the third quarter, recovering from a poor first half of the year and ending the quarter up 4.6% year-to-date.
  • From a sector standpoint, ten of the eleven S&P 500 sectors were positive during the quarter except for Energy, which was down 2.3%. The best-performing sector was Utilities, up 19.4%, bringing their year-to-date performance to 30.6%.

Shifting Fed

As predicted, the U.S. Federal Open Market Committee (FOMC) reduced the Fed Funds rate during their September meeting. While the first cut was widely anticipated, there was uncertainty over its size. Many economists expected either a 0.25% cut or a more aggressive 0.50% cut. Ultimately, the Fed decided on a 0.50% cut but was cautious about setting expectations for the pace and size of future cuts this year.

The Fed has a dual mandate: to control inflation and maintain full employment. To fight inflation, it began raising interest rates in March 2022, raising rates 525 bps by July 2023, the fastest hiking cycle in 4 decades. This aggressive hiking cycle has worked so far, with inflation steadily declining over the past 18 months, though it hasn’t yet returned to the 2% target.

Meanwhile, the U.S. labor market has cooled, with hiring slowing and the unemployment rate ticking up. However, the unemployment rate remains low at 4.1%, and the average number of jobs added to the U.S. economy each month has remained steady. One reason for the job market’s resilience is the high number of open positions, which has provided a buffer. Open positions have declined from a high of 12.2 million in March 2022 to 7.6 million in August, while the unemployment rate has only risen from 3.4% in January 2023 to 4.1%. For context, the average unemployment rate since 1990 is 5.7%.

Consumers vs. Manufacturing

Different parts of the economy are sending mixed signals about overall economic health. Consumers remain strong, which is crucial since personal consumption makes up about 68% of the U.S. economy. The August Retail Sales report surprised economists with a 0.1% increase versus expectations for a 0.2% decline. July’s retail sales report was also revised upward to 1.1%, demonstrating the strength of the U.S. consumer despite above-target inflation.

In contrast, the manufacturing sector presents a more complicated picture. August saw a larger-than-expected increase in Industrial Production, mainly due to a resurgence in automobile manufacturing after Hurricane Beryl hit Texas in July. Year-over-year, there has been no growth in industrial production. Fortunately, manufacturing accounts for only 11.4% of the U.S. GDP, so the strong consumer sector has a more significant impact. Opportunities in manufacturing may also present themselves as declining interest rates reduce borrowing costs on durable goods and building projects.

As of October 8th, the Atlanta GDP Now forecast for Q3 GDP was 3.2%. This continues to support the narrative that the economy is still growing at a healthy pace.

On the Horizon – U.S. Election Day

We are now less than a month away from the presidential election, and it’s shaping up to be a close race. In our last quarterly update, the presumptive nominees were incumbent President Joe Biden and former President Donald Trump. However, after a poor showing in the first Presidential Debate and mounting pressure from political allies, President Biden dropped out of the race, leading the Democratic party to quickly coalesce support around Vice President Kamala Harris.

Despite the new Democratic candidate, uncertainty remains over the potential election results. Vice President Harris has distanced herself from some of her policy stances during the 2020 Democratic primaries, where she positioned herself further to the left. Meanwhile, President Trump faced challenges in the second Presidential debate and has been contending with a low approval rating (as of October 1st, Vice President Harris has a net favorability rating of +1.2%, while Former President Trump has a net favorability rating of -9.6%).

Possibly even more important than the presidential election are the contests for U.S. Congress. There is a real possibility that the Senate could flip to Republican control while the House of Representatives flips to Democrat control. If both events happen, a split Congress could limit the implementation of either candidate’s agenda. A split congress has historically been a tailwind to markets, though history has shown that over a long period of time, the market has trended upward regardless of the party in control.

As we mentioned last quarter, we typically see heightened levels of volatility heading into the election, which, combined with rising geopolitical tension, could lead to choppy stock markets over the next few months.

Geopolitical Tension

As we approach the three-year anniversary of Russia’s invasion of Ukraine and the one-year anniversary of the deadly terrorist attacks in Israel, regional geopolitical pressure remains high. The conflict in Ukraine continues at a stalemate, while aggression between Israel and their neighbors has increased the likelihood of widespread conflict in the Middle East.

This remains one of the biggest risks to continued economic growth. A wider conflict in either region could lead to a larger war, potentially involving superpowers like the U.S. and China. At a minimum, this would likely cause market volatility and a surge in oil prices, not to mention the potential for significant loss of life and humanitarian disasters.

So far, cooler heads have prevailed, but the situation remains tense.

In summary, despite some bumps in the road, the third quarter kept the market’s positive momentum alive.

The S&P 500 soared, the Fed cut rates, and consumers kept spending, even as manufacturing lagged. With election drama heating up and geopolitical tensions simmering, investors shouldn’t be surprised if volatility once again comes calling.

Want to read more about the markets and economy? Check out our blog post, “Will the November Elections Affect the Markets?” detail the potential impacts for the election for investors.

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Investment advice offered through OneDigital Investment Advisors LLC. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. Any reference to a specific company is not a recommendation to buy, sell, or hold any security. Any economic forecasts in this commentary are merely opinion, and any referenced performance data is historical. Past performance is no guarantee of future results. All investment involved risk of loss. Some information has been obtained by sources we believe to be reliable. OneDigital Investment Advisors LLC makes no representations as to the accuracy or validity of this information. Additionally, OneDigital Investment Advisors does not have any obligation to provide revised investment commentary in the event of changed circumstances. Views and Opinions expressed herein are provided as of September 30, 2024.

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