Financial Market Commentary for the Quarter Ending 09/30/2024
- Parkview Partners Capital Management
- Oct 9, 2024
- 6 min read
Third Quarter 2024 Performance Recap
Despite volatility from several concerning issues, e.g., Middle East fighting and turmoil, war in Ukraine/Russia, and election uncertainty, stocks traded at record highs at the end of the third quarter, defying the ‘September Effect’ anomaly. Strong economic data releases following the 50bps rate cut from the Federal Reserve on September 18th led to the continued rally in equities. Conventionally, small-cap stocks (more likely to have floating rate debt) should benefit from interest rate cuts, however, large-cap stocks have outperformed during rate cutting cycles since 1984.1
We believe the U.S. economy remains resilient as GDP growth remains healthy. We believe corporate profits will continue to improve, with some estimates forecasting +14% earnings growth in 2025. Consumer balance sheets remain healthy as employment remains robust (4.1% current unemployment rate has historically been considered full employment). Inflation has continued to moderate and as a result the Federal Reserve will continue to cut interest rates into the foreseeable future. The positives listed above have helped push equity indices to new highs, referenced below.
Important Metrics at a Glance
Interest Rates/Yield Curve
Yield spreads are shrinking as short rates have fallen sharply throughout the third quarter and long rates have risen slightly over the last week of the month. Near the end of August, the 10Y-2Y spread returned to positive territory for the first time since July 2022 and continues to normalize.
The yield curve remains inverted, meaning that short-term rates are higher than long-term rates. This occurs when investors expect high interest rates in the short-term while the Fed battles inflation, but long-term yields are lower on expectations that the Fed will cut rates to stimulate the economy. Because of this, yield curve inversion is historically considered a recession indicator. This recent inversion, however, has persisted longer than any in history and a recession, defined by two negative quarters of GDP growth, has not occurred. We do not expect one.2
Sentiment/Confidence
University of Michigan Consumer Sentiment
The consumer sentiment index rose to 70.1 (vs. FactSet est. 69.3) in September. Both Current Conditions (63.3 vs. 61.3 in August) and Expectations (74.4 vs. 72.1 in August) increased from the month prior. See chart.
Due to elevated pricing, sentiment remains below historical averages, but consumers are aware that inflation is abating. The Expectations index is now 13% higher than a year ago, primarily due to a 6% increase in one-year business expectations. While consumer sentiment is gaining momentum, the outlook of many respondents still depends on election results. Stay tuned.3
U.S. Consumer Confidence
The Conference Board CCI (below, left) fell to 98.7 (vs. FactSet est. 104.0) in September from an upwardly revised 105.6 in August. This September result is near the bottom end of the narrow range the CCI has remained in over the last two years. The indices for Present Situation and Expectations (right) both deteriorated in September as consumers expressed pessimism regarding business conditions and the labor market.4
Resiliency Throughout Election Cycles
We expect the U.S. economy to remain strong. The equity markets have historically provided positive returns over extended periods, irrespective of who is in the White House. As always, it is imperative to maintain a long-term perspective.
Inflation Data
Consumer Price Index
In August, headline CPI increased 0.2% (vs. FactSet est. 0.2%) seasonally adjusted following the 0.2% increase in July. At 2.5% annualized, this is the smallest 12-month increase since February 2021. Core CPI rose 0.3% following a 0.2% increase the month prior. On an annual basis, Core CPI rose 3.2%.
The shelter index increased 0.5% (5.2% ann.) which accounted for over 70% of the increase in TTM (trailing 12 months) Core CPI. Motor vehicle insurance (within Transportation Services) is up 16.5% TTM, while Used Cars and Trucks declined -1.0%, now down -10.4% TTM. Though Energy tends to be volatile, it continues a downward trend for the fourth consecutive month. Stay tuned.5
Personal Consumption Expenditures
Both headline and Core PCE increased 0.1% in August, annualizing at 2.2% and 2.7%, respectively.6
Personal consumption expenditures is a measure of the spending on goods and services by consumers in the United States, which accounts for approximately two-thirds of U.S. GDP. The PCE Price Index is the Fed’s preferred measure of inflation because it encapsulates a broader range of spending and better reflects changes in spending than comparable alternatives. We expect this metric to continue to moderate.7
GDP Data
Atlanta Fed GDPNow Estimate – 10/01
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in Q3 2024 is 2.5% down from 3.1% on September 27, which was the highest projection of the quarter.8
GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.9
Bureau of Economic Analysis GDP
The third estimate of real gross domestic product (GDP) increased at an annual rate of 3.0% in Q2 2024, in line with the prior estimate. This will mark the eighth consecutive quarter of GDP growth. The increase in real GDP is primarily attributable to increases in consumer spending, private inventory investment, and nonresidential fixed investment.
A breakdown of GDP percent change by industry group is included below. This quarter, 16 of the 22 industry groups contributed to the Q2 increase in real GDP.10
Our Thoughts
We continue to be constructive on the economy and the market due to many of the issues reviewed above. We believe that lower interest rates, declining inflation and improving corporate profits remain a sound backdrop for equities. We continue to assess energy as the push-and-pull of prices due to the impact of supply, wars, and global economic growth (China slowing) on the daily value of oil. Barring any black swan events or broader conflict in the Middle East, we feel that oil should remain range bound to weaken. Capital investment in the U.S. from Artificial Intelligence and Onshoring (manufacturing supply chains moved/diversified to the U.S.), which we believe are muti-year investment themes, provide the U.S. economy with a continued growth engine. With respect to the remainder of 2024 and first half of 2025, we do not anticipate a recession. We are conscious of the need to closely monitor issues referenced above as well as others that impact the viability of the economy.
Our objective is to achieve consistent superior long-term relative rates of return by developing high-quality, balanced, and diversified equity and fixed income portfolios with superior composite internal fundamentals. In this pursuit, we believe patience, discipline, and maintaining a long-term perspective are of paramount importance.
We have taken advantage of recent volatility to establish new equity positions in fundamentally strong companies which we believe are well-positioned to benefit from the current macroeconomic environment, and in accordance with client Investment Policy Statement guidelines, to strategically and tactically diversify client assets in the pursuit of long-term capital growth and preservation. We remain cautiously optimistic due to positive trends in economic growth, corporate profits, inflation, interest rates, and consumer strength.
We thank you for your confidence and look forward seeing you in the near future.
Sources
Disclosures
Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities.
The information contained herein has been obtained from sources known to be reliable. However, no guarantee, representation, or warranty, express or implied, is made as to its accuracy, completeness, or correctness.
There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification and asset allocation do not protect against market risk. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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