Third Quarter Recap: Markets Ride a Wave of Volatility and Resilience

Third Quarter Recap: Markets Ride a Wave of Volatility and Resilience

Takeaways

·       Volatility Defined the Quarter: At the beginning of the third quarter, markets swung dramatically as the
presidential election took a few unexpected turns, shaky economic data emerged and global interest rate shifted.

·       Resilience Amidst Uncertainty: Despite the volatility, all major asset classes and sectors ended the quarter in
positive territory.

·       A Look Ahead with Caution: Multiple risks remain, including a U.S. election, multiple global conflicts and
unemployment concerns. To navigate the uncertainty, investors should maintain their focus on economic fundamentals and keep a long-term perspective.

As we look back at the third quarter of this year, one thing stands out: volatility. From economic shocks to unexpected political events, it’s been a rollercoaster for markets worldwide. Despite the challenges, markets remained remarkably resilient, ending the quarter in positive territory. Here’s a look at the key events that shaped the quarter and what they mean for investors.

A Rocky Start in July

The third quarter started off on shaky ground. In July, shortly after the S&P 500 marked a new high, a key indicator of inflation – the core Consumer Price Index (CPI) – came in lower than expected, opening the door for the Federal Reserve to cut interest rates in September. In expectation of lower rates, many investors sold large technology companies in favor of small-cap stocks, which tend to benefit more from lower rates.

Russell 2000 vs The Magnificent 7, Year-to-Date Returns (Indexed to 100)

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: Russell 2000, TSLA, GOOGL, META, NVDA, MSFT, AMZN, AAPL. Index data from December 31, 2023 through September 30, 2024.

In the meantime, the US presidential race took a few hairpin and highly unexpected turns. After a disastrous debate performance, President Biden withdrew from the presidential race, allowing Vice President Kamala Harris to secure the Democratic party’s official nomination for president. Shortly after, former President Trump survived an assassination attempt.

August: Economic Data Creates a Stir

As investors absorbed a new political landscape, August brought more economic surprises. A critical labor market report showed fewer new jobs were created and more individuals were looking for work, suggesting that the U.S. job market might be cooling down faster than anticipated. Investors grew increasingly concerned that the Federal Reserve might need to take swift action to prevent a deeper downturn and began to call for an emergency rate cut to support the economy.

Unemployment Rate (%)

Source: Kestra Investment Management, FRED. Data from May 1948 through August 2024. Grey bars indicate recessions.

Adding to the uncertainty, the Bank of Japan (BoJ) raised its benchmark interest rate in August, a move that strengthened the Japanese yen. This shift had global implications, leading to the unwinding of the yen carry trade, a strategy that investors use to profit from the interest rate differences between countries. As the yen strengthened, investors around the world sold off assets, which triggered a broad market downturn. In a short span, the S&P 500 declined by 8% from its 2024 high and volatility spiked. While this drew investors to safer
investments, like bonds, and led to a 3% rise in the Bloomberg U.S. Aggregate Bond Index.

Volatility Index (VIX), Year to Date

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index: CBOE Volatility Index. Data represents daily volatility from January 1, 2024 through September 26, 2024. 

September: Markets Stabilize, and Stimulus on the Horizon

Fortunately for many investors, the rough patch didn’t last. As August gave way to September, encouraging economic data alleviated investors’ fears, and the market bounced back. Confidence grew that the Federal Reserve would indeed lower interest rates. And true to expectations, the Fed announced a 50-basis point rate cut in September, which spurred a rally in the bond market. In a last-minute development, China announced a major stimulus package aimed at reviving its struggling economy. This late-September announcement sent a positive jolt to Chinese markets. The Hang Seng Index surged nearly 20% over the quarter, a remarkable turnaround following years of lackluster performance. The Chinese government’s intervention highlighted the role of fiscal policy in supporting economic growth, especially in challenging times.

A Strong Finish Amidst Uncertainty

Despite the turbulence, the third quarter ended on a high note. All major asset classes finished the quarter and the year in positive territory, with real estate having a particularly exceptional quarter as investors expect falling interest rates to provide relief to the sector.

Year-to-Date Returns (%)

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future
results. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg U.S. AGG Bond Index, ICE BofA U.S. Corporate, ICE BofA U.S. High Yield, S&P 500, MSCI EM, MSCI World ex US Index, Dow Jones U.S. Select REIT, and Bloomberg Commodity Index. Data as of September 30, 2024.

Most sectors recorded gains, with the notable exception of the energy sector, which struggled amidst concerns about weakening demand. Even so, the energy sector’s challenges did little to dampen the overall market’s strength.

US Equity Sector Year-to-Date Returns (%)

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future
results. Source: S&P and FactSet. Index proxies: S&P 500 Index sectors. Data as of September 30, 2024.

Looking ahead, we can expect more volatility as the U.S. election approaches. Additionally, markets are anticipating a further 25 basis point rate cut from the Federal Reserve. However, several risks remain on the horizon. Political uncertainty surrounding the U.S. election, ongoing conflicts in the Middle East and Ukraine, and lingering inflationary and employment pressures all have the potential to disrupt markets. Furthermore, the market has been more sensitive to economic data releases, which could contribute to short- and medium-term
volatility.

Focusing on Fundamentals

For investors, the events of the third quarter serve as a reminder of the importance of focusing on long-term fundamentals. While external events and market fluctuations can be unsettling, the broader economic outlook remains positive. Earnings are holding steady, GDP growth forecasts are solid, and underlying economic indicators suggest that the economy is on firm footing.

In times of uncertainty, it’s essential for investors to stay grounded and remember that markets often go through periods of volatility. Rather than reacting to short-term events, investors are wise to focus on the fundamentals: sound companies with solid earnings, a balanced approach to risk, and a clear investment strategy. As we move into the final quarter of the year, maintaining a long-term perspective will be key to navigating the market’s ups and downs.

The Bottom Line

The third quarter was a testament to the market’s resilience. From political shake-ups to global economic shifts, it was a period
marked by significant challenges. Yet, through it all, markets found a way to end on a positive note. As we look to the future, the path forward may not be smooth, but with a steady focus on fundamentals and an eye on the long term,
investors can continue to navigate the landscape with confidence.