The Third Quarter was one for the record books as the major US stock indexes posted all-time highs along the way, including the Dow and S&P closing the quarter at record highs. Q3 was not without volatility, as both August and September had rough starts with some growth scares. But markets found their ground each time and mostly finished with gains each month and broadly over the quarter in record setting fashion.

The market broadened in Q3 beyond the large-cap growth Magnificent Seven that has dominated the market for an extended period. While the tech-heavy Nasdaq closed Q3 leading YTD with a 21.2% gain and setting all-time highs in July, it lagged in the quarter rising a modest 2.6%. However, over the trialing 12-months, Nasdaq has gained a leading 37.6%.

It was the small-cap Russell 2000 that led Q3 posting a gain of 8.9%, largely due to a blistering 10% gain in July, when it hit an all-time high. The Russell 2000 closed the quarter up 10% YTD and 24.9% for the trailing 12 months. The mid-cap S&P 400 rose 6.6% in Q3 and set multiple record highs during the quarter as well, including in September ending up 12.2% YTD and 24.7% over the trailing 12 months.

The Dow Jones Industrials and benchmark S&P 500 closed Q3 at all-time highs, with the Dow closing over 43,000 and the S&P 500 closing over 4700 for the first time ever. The Dow gained 8.2% in Q3 to finish up 12.3% YTD and 26.3% over the trailing 12-months. The S&P 500 gained 5.5% in Q3 to finish up 20.8% YTD and up a staggering 34.4% over the trailing 12 months.  Four years ago, the Dow was at 27,281 and the S&P 500 was at 3,363 and the gains have been remarkable.

Overseas, the Q3 gains have been solid as well, with the benchmark MSCI EAFE index setting all-time highs along the way. The MSCI EAFE index gained 6.7% in Q3 and finished up 10.4% YTD. Emerging markets surged in September on the Fed rate cut news, gaining 6.5% for the month and 7.8% for the quarter to finish +14.4% YTD. The MSCI World All-Cap index also set record highs in Q3, gaining 6.3%, to finish +16.5% YTD.

Following five months of trending declines in CPI and PCE inflation towards the Fed’s 2.0% target, the Fed ended a 14-month pause and cut policy rates by 0.50% at its September FOMC meeting. It was the first Fed rate cut in four years, and the Fed signaled two more 0.25% rate cuts by year end, with one in November and December, and four more in 2025. Given the stronger than expected economic numbers for Q2, the market had been expecting 0.25% but the cooler jobs reports and unemployment ticking up to 4.3% in July, though edged down to 4.2% in August, gave the Fed impetus to frontload the expected rate cut cycle. The economic soft-landing narrative has further strengthened, and recession risk remains low. Future Fed cuts in terms of size, quantity, and pace will be data driven.

The US economy, as measured by Gross Domestic Product, hit an all-time high of $29 Trillion at the end of Q2 2024, and is trending at a 3.2% annualized rate for Q3, according to the Atlanta Fed. Just prior to the Covid-19 pandemic, US GDP peaked at $21.9 Trillion Q4 2019 before falling to $19.9 Trillion at the Covid low in Q2 2020. The US economy and economic growth leads all G-7 nations.

The benchmark 10-year Treasury Note yield fell 0.55% in Q3 to 3.81%, as Fed rate cut expectations rose. The Bloomberg Aggregate Bond index rallied 5.4% in Q3 to finish up 4.4% YTD. For the trailing 12 months, the Agg Bond index has had a 11.6% total return. 

The Outlook

The 2024 Presidential Election is just over two weeks away and it is natural investors may be nervous. We have had a couple of challenging bouts of volatility in 2024, but they have not been election related. Rather, volatility has been centered on interest rates, inflation, and Fed policy. Pullbacks and corrections are normal in any year, and we may yet see some late bumpiness in the market ahead of November 5. However, the Fall WAA emphasizes the importance of looking well past the election when it comes to your investment portfolio.

There is an old Wall Street saying, “Don’t fight the Fed.” In a nutshell, when the Fed is cutting interest rates, it has been good for the market historically. Though past performance is no guarantee for future results. The Fed cut interest rates by 0.50% at its September FOMC meeting as is expected to continue cut two more times in 2024 and four more times in 2025. Intermediate-term interest rates, as measured by the benchmark 10-year Treasury Note yield, have moved higher in October and back above 4%, post the September Fed rate cut, and bears watching as interest rates adjust to stronger economic news and possible slower and/or less rate cuts going forward. 

We remain optimistic heading into Q4 2024: 

• The US economy continues to grow solidly and leads all G7 developed economies
• The economic soft-landing narrative has further strengthened with the Fed’s September rate cut and more expected; recession risk remains low
• Inflation continues to trend down towards the Fed’s 2% target
• Corporate earnings remain solid
• Job growth has moderated, though unemployment remains low at 4.1% (Sept)
• Valuations overseas remain attractive
• We continue to look for a broadening of market returns in Q4

During periods of uncertainty and volatility, it is important investors:

• Remain well-diversified
• Maintain discipline and patience
• Focus on the long-term
• Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team   

*Past Performance is No Guarantee for Future Results

Our partners at State Street Global emphasize "Time in the market is better than timing the market — a tactic to remember during in-and-out of election season."  Whether it is election years or just during periods of volatility, trying to time the market is impossible, even for legendary investors. We encourage investors to think long-term and well-past the November elections with their investment portfolios. 

Source: Bloomberg Finance L.P. as of December 31, 2023. State Street Global Advisors. Past performance is not a reliable indicator of future performance. Always invested is the price return on the S&P 500 Index. Cash return as measured by the annual yield on the US 3-Month T-Bill. Portfolio would move to cash on the first day in the year of an election and go back into the S&P 500 on the first day of the next year. S&P 500 Index return is price return only and does include the reinvestment of dividends.

Source: BlackRock, Morningstar, as of December 31, 2023. Party presidency period determined by party presidency inauguration to next opposing party presidency inauguration. Stock market represented by the S&P 500 Index from 1/1/70 to 12/31/23 and IA SBBI U.S. large cap stocks index from 1/1/54 to 1/1/70. 

Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in an index.
Chart description: Line chart showing the appreciation of $1,000 invested in U.S. large-cap stocks during democratic presidential terms only, republican presidential terms only, and the entire time, since 1953.

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