Third Quarter 2024 Review

By White Pine Wealth Management

The following are some of the main themes we’re watching as we move into the second half of 2024. It is far from certain how the rest of the year will unfold, but each of these themes could present different investment opportunities, depending on how they resolve.

Executive Summary

• The US equity markets continued their upward trend in Q3, with the S&P 500 Index adding another 5.89%, bringing its year-to-date total return figure up to 22%.³

• After a prolonged period of high market concentration, market participation began to broaden in Q3. The Technology sector contributed 0% to the S&P 500 index’s total return in the 3^rd quarter, after contributing 95% of the index’s return in the 2^nd quarter⁵. The strongest performance in Q3 was found among small-caps and value-oriented stocks, with the Russell 1000 Value Index posting a 9.43% gain over the 3 months ending on Sept. 30^th, and the Russell 2000 index of small-cap stocks adding 9.27%. In contrast, the tech-heavy Nasdaq Composite gained 2.76% in the 3^rd quarter.³

• Overseas, the MSCI All Country World Ex-US Index rose 8.17% in the 3^rd quarter, bringing its year-to-date return up to 14.7%. On a more granular level, European equities advanced 6.63% in the 3^rd quarter with Emerging Markets adding 8.88%. But perhaps the most notable development overseas during Q3 was sharp resurgence of Chinese stocks. After a multi-year slump, the MSCI China Total Return index rose 23.64% in the 3^rd quarter.³

• In the bond markets, widespread expectations that the Fed would begin cutting rates in 2024 sparked a bond rally, with the Bloomberg US Aggregate Bond Index rising over 5% in the 3^rd quarter and nearly 12% over the past 12 months. Though rising bond prices have brought yields down from where they were at the start of the year, the widely expected continuation of rate cuts should encourage investors to lock-in the present yields while they still can. As of 09/30/2024, the average yield across investment-grade corporate bonds is 4.7% and the average yield on High-Yield corporate bonds is 7.0%, both of which remain above their 10-year medians.¹

Fourth Quarter 2024 Outlook

Areas we are watching as 2024 draws to a close:

• Market leadership: The weight of the top 10 stocks by market capitalization in the S&P 500 index fell modestly in the 3^rd quarter, but still stands at an historically high level of 35.8% and dwarfs previous peaks in concentration. Since popular benchmarks such as the S&P 500 index are market-cap weighted, heightened levels of market concentration have meant that the performance of the index as a whole has been heavily influenced by a very small group of stocks in recent years, and this obfuscates how the “average” stock is performing. If current levels of concentration recede, it could have a profound impact on relative performance for actively managed portfolios. For example, perhaps the most notable instance where market concentration decreased from a lofty level was during the aftermath of the dot-com bubble bursting. Over the 6-year period from the beginning of 2000 through the end of 2005, the lesser-known S&P 500 Equal Weight Index (which as its name suggests gives equal weighting to each stock in the index) had an annualized total return of 8.05% while the headline S&P 500 index actually fell -1.13% on an annualized basis³.

• The Election: Based on historical returns data, the markets have been generally indifferent towards which party occupies the oval office, with booms and busts occurring in both Republican and Democratic administrations. What the markets have tended to favor, however, is divided government, where one party controls the House and the other party controls the Senate. The logic here is that the markets do not like surprises and when the Government has a limited capacity to enact legislation, a continuation of the status quo is more likely. It is true that the political parties tend to favor differing regulatory environments, tax philosophies, and foreign policy priorities, but such details can be nullified by a diversified portfolio and a long-term perspective. According to Hightower Investment Solutions, a $1,000 investment in the S&P 500 at Franklin Roosevelt’s inauguration on March 4^th, 1933 would have grown to over $21million by the end of 2023.

• The Federal Reserve and Interest rates: At the September meeting of the FOMC the Fed cut the Target Fed Funds rate by 50 basis points, roughly 13 months after the last rate hike in July of 2023. While it may seem odd for the Fed to cut interest rates at a time where the economy is growing at a 3.1% clip⁷, Chairman Powell’s remarks indicate that the Fed is attempting to balance their oft-conflicting goals of low inflation and full employment. Given the impact rates have on stocks, bonds, and the economy, we will closely watch the cadence and possible ramifications of potential future rate cuts.

• Geopolitics: The War in Ukraine rages on, atrocities continue to plague South Sudan, China has reminded the world that it views Taiwan as part of its sovereign territory, and Israel’s war in Gaza has sparked a flare-up with Hezbollah and, by extension, Iran. Though the present day might seem more dangerous than normal, conflict-free periods throughout world history have been relatively rare and fleeting. Still, conflict and the threat thereof can have economic impacts, most commonly the price of oil and commodities.

Performance data provided by ¹JP Morgan Asset Management, ²Strategas, ³YCharts, ⁴Black Diamond, ⁵Hightower Investment Solutions, ⁶ Nasdaq Dorsey Wright, ⁷Atlanta Fed Tracker, as of 9/30/2024