3rd QUARTER 2024 MARKET REVIEW
10/10/2024
Investors may want to consider rotating from cash to Treasuries and/or corporate bonds.
Thrivent Asset Management contributors to this report: David Spangler, CFA, head of mixed asset & market strategies; John Groton, Jr., CFA, director of administration and materials & energy research; Matthew Finn, CFA, head of equity mutual funds; Kent White, CFA, head of fixed income mutual funds; and John Liegl, CFA, investment product manager
Both the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index were up in September.
The stock market broadened, with more sectors showing positive returns.
Both payroll data and unemployment rates were improved as September closed.
The third quarter got off to a rocky start as uncertainty and volatility accelerated from late July into August. While economic data was mixed, there was little to seriously question the prevailing view that the economy would achieve a soft landing, until July’s employment data—released on August 2—shocked markets. New job creation fell to 114,000, well below expectations, sparking concern job growth could rapidly deteriorate. Both stock and bond markets feared the U.S. Federal Reserve (Fed) was now behind the curve. Fueled by a perfect storm of uncertainty, including concerns about U.S. earnings, the sudden strength in the Japanese yen and domestic and geopolitical headlines raising fears of accelerating policy uncertainty, volatility spiked. Between July 17 and Aug 5, the S&P 500® Index corrected 8.5%, while short- and long-dated Treasury yields dived through their year-to-date lows.
But the panic proved short lived. As August unfolded, economic data revealed a more resilient economy and declining inflation. By and large, investors quickly came back to the view that the U.S. economy could achieve a soft landing and the Fed could be more moderate in its interest rate cuts. On August 20, Fed Chairman Jerome Powell grounded market expectations: “The time has come for policy to adjust,” he said, adding that his “confidence has grown that inflation is on a sustainable path back to 2%.” Markets took that to mean a September rate cut could be assumed.
Markets were correct, and in mid-September the long-awaited, rate cutting began, with the Fed cutting interest rates a somewhat more-than-expected 50 basis points (bps). When stronger labor market data was revealed in early October, the market’s optimism about the robustness of the U.S. economy was confirmed. However, it also raised concerns the Fed may have been too generous in cutting 50 bps and expectations for aggressive rate cutting might have to be tempered. Nevertheless, it was a positive month for a balanced portfolio, with both the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index up 5.53% and 5.20%, respectively.
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The S&P 500 Index rose 5.53% over the third quarter, with strength broadening across the index to more interest-rate sensitive and cyclical sectors, supported by interest-rate cuts and resilient economic activity. Other than energy, all other sectors within the index posted positive performance for the quarter. Over the period, the index rose from 5,460.48 at the end of June to 5,762.48 at the end of September. The total return of the S&P 500 Index (including dividends) was 5.89%.
The NASDAQ Composite Index® rose 2.57% over the quarter, from 17,732.60 at the end of June, to 18,189.17 at the end of September, bringing its year-to-date gain to 21.17%.
Retail sales rose more than expected in August, according to the September 17 report from the U.S. Census Bureau, and July’s sales estimates were revised significantly higher, from 0.1% to 1.1%. August’s month-on-month change was an increase of 0.1% and a 2.1% increase from August of last year. Higher-than-expected sales were largely driven by online sales, which rose 1.4% in August after falling in July.
Weak job growth early in the quarter raised concerns about the health of the U.S. economy, but September’s payroll data revealed the highest job growth in six months (254,000 new jobs) and revised the prior two months higher by 72,000 new jobs. The unemployment rate also improved, falling to 4.1%. Finally, wage growth was moderate, with hourly earnings up 4.0% over the prior 12 months. All figures are according to the Department of Labor’s October 4 report.
Of the S&P 500 Index’s 11 sectors, all but one posted positive performance over the quarter. Previous laggards, like utilities and real estate, led the market higher over the period, generating 19.37% and 17.17% returns, respectively. Previous leaders like information technology (up 1.61%) and communication services (up 1.68%) generated relatively modest performance.
The chart below shows the results of the 11 sectors for the past month, third quarter, and year to date.
The yield on 10-year U.S. Treasuries steadily declined from its peak of 4.70% in the second quarter as fears grew about slowing economic growth, setting a new year-to-date low at 3.62% in mid-September. However, the Fed’s 50 bps rate cut in September sparked some retracement in yields on fears the Fed was being too aggressive, fueling risks of inflation slowing its decline.
The Bloomberg U.S. Aggregate Bond Index rose 5.20% over the quarter, bringing its year-to-date return into positive territory, up 4.45%.
Corporate 12-month earnings projections for the S&P 500 Index continued their steady rise since the start of the year. Earnings per share (EPS) estimates rose 2.51% during the quarter. While corporate earnings are still expected to grow and reach new highs, the anticipated EPS growth rate for 2024 has slightly decreased and third quarter earnings estimates have been revised downward since June 30, pointing to a more cautious outlook compared to previous quarters.
The forward 12-month price-earnings ratio (P/E) of the S&P 500 Index rose 2.44% over the third quarter, from 20.01 at the end of June to 21.52 at the end of September. A higher P/E ratio means stocks are more expensive relative to their EPS.
The forward 12-month earnings yield, which is the inverse of P/E, fell over the period. At 4.64%, the forward 12-month earnings yield remains above the 3.78% yield offered by 10-year U.S. Treasuries at the end of September, but the gap continues to narrow. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields.
The U.S. dollar appreciated versus the euro, rising 4.13% over the quarter, but fell substantially relative to the Japanese yen, falling 11.08%. Relative to the euro, U.S. dollar strength was in part due to expectations that U.S. interest rate cuts would be pushed back while the U.S. economy remained relatively robust, and rates would continue to fall in the eurozone. The dollar’s weakness relative to the yen was more driven by the yen’s strength as the currency benefited from rising interest rates in Japan.
Oil prices fell over the quarter, with the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, declining 16.40%, from $81.54 at the end of June to $68.17 at the end of September. While prices spiked higher during the period on the back of increasing tensions in the Middle East, their decline over the quarter was largely due to growing concerns about the health of the global economy dampening demand.
Gasoline prices at the pump also fell (6.92%) over the quarter, from $3.56 at the end of June to $3.31 at the end of September, largely due to declining oil prices.
The price of gold continued its surge in the third quarter, rising 13.67% and bringing its year-to-date gain to 28.36%. Gold prices have been supported by expectations of falling interest rates, which diminishes the opportunity cost of holding gold, as well as foreign demand and the desire to hold assets that could be a hedge against political risk.
International equities, as measured by the MSCI EAFE Index, rose 6.65% over the third quarter, raising its year-to-date gain to 10.40%. The index had a weaker start to the quarter, weighed down by the high volatility in U.S. markets and lingering concerns about eurozone elections impacting the region’s fiscal targets. But over the period, the index rose to new highs, supported by a rebound in U.S. markets and rising markets in Asia.
Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com
All information and representations herein are as of 10/10/2024, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.
The Bloomberg U.S. Aggregate Bond Index is an unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market.
The MSCI EAFE Index is an unmanaged index designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
