Defying historical precedent, September posted the first positive gain for the S&P500 since 2019. Equity markets in general continued to steamroll through 2024, returning a positive full quarter in Q3, marking the fourth straight quarterly gain. Furthermore, for the first time since 1997, the S&P500 posted an increase of greater than 20% for the first three quarters to start a year. An increase of this size has only occurred in 10% of years since 1950. The primary bullish catalyst is the outlook for the Federal Reserve (Fed) to continue to loosen up the rate forecast. On September 18th, the Fed slashed the benchmark rate 0.50%, to bring the benchmark to 4.75%-5.00%. This was the first reduction in the Fed Funds Rate since the start of the Covid Pandemic in March 2020. Further easing is anticipated, with 50 basis points in reductions by the end of 2024 and another 1.00% by the end of 2026. Consistent with past rate reduction cycles, the easing brought about an oversized decrease in the 10-yr U.S. Treasury rate to end the quarter at 3.74%.
We continue to remain cautious in broadly recommending equities, as labor markets are showing signs of cooling, valuations are stretched and volatility is expected to increase heading into the U.S. Presidential election. As we pointed out last quarter, mega cap stocks that have been guiding the ship cooled in Q3. Small cap, mid cap and international stocks all outperformed for the quarter, showing why we always try to diversify our client portfolios to take advantage of the ever-changing and evolving leadership in equity returns. While we’re always anticipating another market correction or 10% or greater, we feel that any such decrease in equity prices will be bought up by the over $6.5 trillion dollars sitting in U.S. banks. Further bolstering this position is the fact that money market rates that have provided greater than 5.00% interest for the first three quarters of the year, have now fallen below 5.00%. As the rate continues to decline, investors will invariably look for another avenue to grow those funds at a higher return.
The S&P500 rose 5.9% in Q3, while the tech heavy NASDAQ rose 2.1%. The DJ Industrial Average increased 8.7% and internationally, the EAFE improved by 7.3%. Fixed Income, measured by the Bloomberg U.S. Aggregate Bond index posted a nice gain in Q3 of 5.2%. U.S Treasuries finally reversed the recent trend of being inverted and got back on a more normal path, as the 2-yr ended the quarter at 3.61%, while the 10-yr ended at 3.74%. Gold ended the quarter with an outsized gain of 13.5%, showing that there is still a large amount of uncertainty in equity and bond markets. Crude oil continued on its path from Q2, dropping -7.1% for the quarter, now down -4.3% for 2024. The average stock in Morningstar’s coverage universe ended the quarter trading 3% above fair market value. Utilities and Technology traded to end the quarter 15% and 11% overvalued, while Communication Services and Energy ended Q3 trading 13% and 7% below fair market value respectively1. The current P/E ratio of 29.65 for the S&P500 now represents a valuation that is 84% over the historic average.
We look forward to navigating the equity and bond markets for our clients, while continually earning your business, your referrals and your respect.
Jack A. Kennedy
Chief Investment Officer
1 Results referenced from Morningstar.com