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 percent for the third quarter. The S&P 500 Index rose 5.53 percent while the tech-heavy Nasdaq Composite gained 2.57 percent 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 seemed to mark 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 percent 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 percent—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 percent—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 percent cut surprised some, who anticipated the Fed would be more cautious during an election year. [12,13]
Sector Scorecard
All but two sectors of the S&P 500 were positive for the quarter, reflecting broad market strength.
Utilities (+18.55 percent) and Real Estate (+16.30 percent) led, with Industrials (+11.13 percent), Financials (+10.24 percent), and Materials (+9.14 percent) in the next tranche down. Consumer Discretionary (+9.85 percent) and Consumer Staples (+8.38 percent) also delivered solid gains, while Communications Services (+5.53 percent) and Health Care (+5.67 percent) kept pace with the S&P 500. Energy (-3.69 percent) and Technology (-0.21 percent) were the only sectors that declined over the quarter. [14]
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.
World Markets
The MSCI EAFE Index rose 6.65 percent during Q3, benefiting from easing monetary policy in many central banks. [16]
European stocks rallied in Q3, with Spain (+8.53 percent) and Germany (+5.97 percent) notching solid gains. France, the UK, and Italy rose, but the gains were modest. [17]
Among emerging markets, Egypt rose 14.77 percent, and Brazil picked up 6.38 percent. On the Pacific Rim, China’s Hang Seng index rose 19.27 percent, which led the group. Other markets were mixed, with Australia picking up 6.47 percent while Japan’s Nikkei slipped 2.35 percent. [18,19]
Indicators
Gross Domestic Product (GDP)
The third estimate of GDP showed the U.S. economy grew 3.0 percent on an annualized basis in Q2, unchanged from the second estimate and higher than the initial 2.8 percent estimate. The final estimate was slightly higher than economists’ expectations of 2.9 percent growth and more than double the first quarter’s 1.4 percent annualized pace. [20]
Employment
Job growth rebounded in August. Last month, the 142,000 jobs added by employers was weaker than the 161,000 economists expected but higher than the downwardly revised job gains of 89,000 in July and 118,000 in June. Unemployment slid to 4.2 percent in August. Wage growth increased by 0.4 percent month-over-month and rose 3.8 percent over the prior 12 months. [21]
Retail Sales
Consumer spending inched up 0.1 percent in August over the prior month, above economists’ expectations. Retail sales increased 2.1 percent year-over-year. [22]
Industrial Production
Industrial output rose 0.8 percent in August—the largest increase since May—driven by a recovery in motor vehicles and parts. The increase topped economist expectations. [23]
Housing
Housing starts rose 9.6 percent in August—the highest level since January 2007. The increase was driven by new single-family home construction and falling mortgage rates. [24]
Sales of existing homes fell 2.5 percent in August as prospective homebuyers appeared to be taking a wait-and-see attitude despite lower mortgage rates and higher inventory. Sales dropped 4.2 percent from a year earlier. The median existing-home sales price was $416,700, up 3.1 percent from a year prior. [25]
New home sales fell 4.7 percent in August, which was a turnaround from July’s 10.6 percent month-over-month gain. The median new home sales price was $420,600, down 4.6 percent from a year prior. [26]
Consumer Price Index (CPI)
Consumer prices rose 0.2 percent in August and 2.5 percent from a year earlier, slightly milder than economists expected and cooler than July’s 2.9 percent annualized pace. It was the CPI’s lowest level in more than three months and marked the fifth straight month of cooling inflation. Core CPI, which excludes food and energy, grew at 3.2 percent on an annualized basis, which was in line with expectations. [27]
Durable Goods Orders
Orders of manufactured goods designed to last three years or longer were unchanged in August, besting expectations for a 2.6 percent decline. The largest drag on orders was civilian aircraft, which pulled down the whole transportation sector by 0.8 percent. Excluding civilian aircraft, durable goods orders rose 0.5 percent in August. [28]
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 percent to 5.0 percent. 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.” [29]
The Fed’s September decision reflected “greater confidence that inflation is moving sustainably toward 2 percent” and that the “risks to achieving its employment and inflation goals are roughly in balance.” [30]
By the Numbers: Pumpkins
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