Client Access  |  Careers & Advisory Teams
Market Update Iconic Image
October 10, 2024

Q3 2024 Market Update

Investment Committee

As Recently Shared with JNBA Q3 2024 Statements.

Rate cuts arrive, but what does it mean?

Markets continued to perform well through Q3, with a key event arriving in September when the Federal Reserve made its first interest rate cut since the early days of the pandemic. This decision followed a string of positive inflation results and worsening, albeit still robust, unemployment data.

Fed Chair Jerome Powell emphasized this balance between inflation and unemployment throughout his post-cut press conference. He stated, “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent,” and highlighted that “this decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent .”

In simpler terms, the Fed is attempting to achieve the ever-elusive “soft landing” – raising interest rates initially to curb rising inflation, then lowering them once inflation becomes more manageable to avoid higher, restrictive rates causing greater harm to unemployment and the overall economy.

So, what does this mean going forward? Chair Powell emphasized that the Federal Reserve is “not on any preset course” after the 50-basis-point cut, adding that “this recalibration…will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation.” While details are sparse, markets seem to be expecting consistent rate cuts in some form over the coming meetings.

This represents a unique period in interest rate adjustments, where previous cuts were typically responses to severe economic challenges, such as the Great Financial Crisis in 2008 or the COVID-19 Pandemic of 2020. A potential recession has been forecasted and postponed for almost two years, but how the economy progresses will likely depend more on business and consumer activity than on how well the Fed manages this interest rate adjustment. Updated inflation, unemployment, and corporate earnings reports are what the Fed has been referring to as “new data coming in,” which consistently impacts the overall economy.

As to how this has all been interpreted by the markets, the S&P 500 is near all-time highs and fixed income markets provided a strong quarter. Bonds have rallied dramatically in the quarter following the reduction in interest rates, finishing Q3 up 5% and 4% on the year.

The sharp rise in interest rates throughout 2023 did come with one benefit: greater than 5% yields on CDs and short-term treasuries. After a rough 2022 for both stocks and bonds, it’s understandable that many investors sought comfort in low-risk, attractive returns for the next year. However, as is often the case for long-term strategies, remaining fully invested in a diversified portfolio of stocks and bonds remains crucial for long-term success. Even across shorter periods, over the last 12 months CDs/Short-term Treasuries have returned approximately 5%, while the U.S. Aggregate Bond Index has returned 11%, active bond managers 11 to 12%, International Developed Equities +25%, and the S&P 500 +36%. Investors with maturing CDs may want to take a fresh look at the need for short-term liquidity vs. long-term goals amidst a lower rate environment.

The landscape for stocks and bonds has been constantly shifting, making it difficult for long-term investors to ignore the short-term headlines. Factors like narrow market leadership, mixed economic reports, potential seasonal weakness, and an upcoming presidential election continue to draw investors’ attention.

How this impacts portfolios today

Over the past four years, investors have had plenty of reasons to be nervous. Even the most optimistic have recognized the uniqueness of this environment, with elevated evidence for how things could quickly go awry. Yet, the U.S. stock market has “climbed the wall of worry,” overcoming the challenges of 2020 and 2022 and to reach all-time highs. Historically, this has been the U.S. stock market’s pattern. The conviction needed to bet against this long-term trend is naturally high, despite the evidence suggesting that ‘this time could be different’ remains similarly high.

The backdrop for this trend to continue remains familiar, revolving around the less volatile but potentially more boring factors than the daily headlines: corporate earnings, unemployment, and inflation. Despite setbacks, the overall economy has been resilient, with corporate profitability still near all-time highs. With unemployment remaining low and corporations maintaining strong profits, it’s difficult to see any immediate recession.

Embracing discomfort while recognizing real challenges and remaining flexible enough to adapt is as important as ever. At the start of the year, we positioned our portfolio strategies with an overweight allocation to equities and an underweight allocation to fixed income, specifically increasing direct S&P 500 exposure across our broad client portfolios. So far, the S&P 500 has outpaced broader fixed income by ~11% year-to-date. A strong first nine months naturally raises some concern going forward, but we believe we are well-positioned to navigate potential weaknesses while still having sufficient exposure to benefit from continued market strength.

Diversifying across a broad range of investments, instead of relying too much on one asset class, can provide a stabilizing influence amidst periods of heightened volatility. While the headlines keep churning, we remain focused on a long-term perspective while maintaining the flexibility to adjust when necessary to help keep our clients on the right path. As always, please reach out to your JNBA Advisory Team with any questions.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.

Please see important disclosure information at jnba.com/disclosure

RECENT INSIGHTS