By David K. MacLeod, CFA, CFP®

Stocks ended the quarter at a new high, with the S&P 500 up 6%, led by dividend payers and utilities while tech stocks cooled off. Diversification rewarded investors as small company stocks jumped up 10% and international stocks gained 9%. Value stocks performed better than growth stocks. Bonds also performed well as the 10-year U.S. Treasury yield declined a half percent to 3.8%.

Inflation has cooled for five consecutive months and is expected to reach the Federal Reserve’s target of 2% soon. Concern among economists shifted from inflation to the labor market after the U.S. Department of Labor revised lower the number of jobs added by 800,000 for the 12-month period ending March 2024. The unemployment rate remains historically low at 4% but job gains has been slowing. The aftermath of Hurricane Helene is expected weigh on upcoming jobs reports. The good news is that there are 8 million job openings according to the JOLTS program so there is still about one job opening per unemployed person.

The job market outlook will depend on economic growth. At this point, a recession isn’t in the short-term outlook. Real GDP growth for the third quarter is expected to be close to the 3% growth rate achieved in the second quarter. While housing and net imports have held GDP back a little, consumer spending has been driving the economic expansion as U.S. household net worth hit a new all-time high of $164 trillion.

One year ago, in our 9/30/2023 quarterly letter, we shared key insights from JP Morgan’s study of the past 40 years of Fed interest rate hiking cycles. The study found that after short-term interest rates peak, stocks and bonds typically perform better than CDs and money markets in the following 12 months. That proved to be true again this time with both stocks and bonds meaningfully outperforming over the past 12 months. Looking ahead, JP Morgan’s analysis also showed that after the first Fed rate cut, stock returns are positive over the next 12 months as long as the economy avoids a recession.

All attention is now on the 2024 U.S. presidential election. Research Affiliates has found that, historically, stocks tend to rise after close presidential elections. But we wouldn’t be surprised to see higher market volatility in the weeks ahead of the election. We recommend maintaining a long-term investment strategy that is resilient through presidential elections and ups and downs of the economic cycle.

Please do not hesitate to call if you have questions or want to schedule a meeting.

2024 Third Quarterly Letter

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