U.S. Markets
Investors welcomed the Fed’s decision regarding short-term interest rates, causing stocks to post solid gains in the third quarter.
The Dow Jones Industrial Average, which dipped in Q2, picked up 8.21% for the third quarter. The S&P 500 Index rose 5.53% while the tech-heavy Nasdaq Composite gained 2.57% as investors rotated away from technology names in favor of other groups (See Sector Scorecard).1
Small Caps Shine in July
Stocks were mixed in July despite economic data that marked a turning point in the Fed’s view on interest rates. Investors eventually became more confident that inflation was slowing as anticipation built around a potential rate adjustment.2
The improving inflation outlook sparked a rally in the Russell 2000, which gained more than 10% in July. Investors anticipated small caps might benefit if the Fed adjusted rates.3,4
Twin Inflation Reports in August
August began with a disappointing employment report showing that job growth in July slowed more than expected, and unemployment increased to 4.3%—the highest rate since October 2021. On the same day, Japan’s Nikkei dropped on concerns about a trading strategy called a “carry trade,” which briefly pressured global financial markets.5,6
But stocks rebounded mid-month as fresh economic data also bolstered confidence. The Producer Price Index (PPI) and the Consumer Price Index (CPI) rose less than expected in July, reinforcing the “cooling inflation” narrative. The July retail sales report was stronger than expected, which also helped boost sentiment.7
Later in the month, Fed Chair Jerome Powell, in his Jackson Hole symposium speech, indicated the time had come to adjust monetary policy, which was considered welcome news by investors.8
The Fed’s Bold Move in September
In September, markets were volatile as investors waited for an update on interest rates following the Fed’s two-day meeting. Early in the month, weak manufacturing data and mixed jobs data reawakened recessionary fears, which put pressure on stocks and led to the S&P 500 posting its worst week since March 2023.9,10,11
Stocks initially fell when the Fed announced it was cutting interest rates by 0.5%—the first reduction in four years—but then rallied. The Dow topped 42,000 for the first time, while the S&P crossed the 5,700 mark. The 0.5% cut surprised some, who anticipated the Fed would be more cautious during an election year.12,13
The Fed
The Federal Reserve cut interest rates by a half percentage point at its September 17–18 Federal Open Market Committee (FOMC) meeting, bringing the Fed Funds target range to 4.75% to 5.0%. It was the first change in the Fed Funds in 14 months and the first cut in short-term rates in 4½ years.
A majority of FOMC voting members also indicated that rates may adjust at the two remaining Committee meetings in 2024. Still, Fed Chair Powell, following the meeting, told the National Association for Business Economics that “we are not on any preset course.”16
The Fed’s September decision reflected “greater confidence that inflation is moving sustainably toward 2%” and that the “risks to achieving its employment and inflation goals are roughly in balance.”17
What Investors May Be Talking About in October
In the month ahead, expect some attention to start shifting to the housing market now that Fed Chair Powell has confirmed that “the time has come for (monetary) policy to adjust.”
Mortgage rates have been trending lower since hitting a peak in October 2023. Loan rates may continue to move lower since Powell said that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”15
There is a group of existing homeowners who may have delayed mortgage decisions in recent years because they don’t want to leave a low-interest rate home loan. If mortgage rates trend lower, some homeowners may reach a higher level of comfort making a move.
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At Patriot, we will continue to focus on what we can control – asset allocation, costs, and having a plan. We consistently communicate the importance of diversification through low-cost index funds, reasonable withdrawal rates, and not trying to time the market. These three variables are critical in the success of one’s financial plan. If you want to review your allocation or your goals, we are a phone call or e-mail away.
- WSJ.com, September 30, 2024
- WSJ.com, July 31, 2024
- WSJ.com, July 31, 2024
- WSJ.com, July 31, 2024
- NBCNew.com, August 2, 2024
- CNBC.com, August 5, 2024
- WSJ.com, August 14, 2024
- Reuters.com, August 23, 2024
- WSJ.com, September 3, 2024
- WSJ.com, September 6, 2024
- WSJ.com, September 11, 2024
- WSJ.com, September 19, 2024
- CNN.com, September 20, 2024
- SectorSPDRS.com, September 30, 2024
- Forbes.com, September 30, 2024
- CNBC.com, September 30, 2024
- WSJ.com, September 18, 2024
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