Q3 2024 Review: Market & Economic Commentary

The Q3 2024 Review: Market & Economic Commentary with Chief Investment Officer Matthew Harbert, CFA and President & CEO, David Silver, CFP®, CEPA®.

Play the video recording, or see the takeaways for each section below organized by section & topic. Each topic has screenshots from the presentation.

Table of Contents:

• Investment Markets (0:43)
  • Broad equity markets
  • Volatility Index
  • Expanded markets
  • Value vs. Growth
  • Value vs. Growth for all Caps
  • Magnificent 7 & S&P 500
  • Index Concentrations
• U.S. Economy (15:56)
  • CPI vs PCE
  • Contributors to Inflation
  • Employment
  • Fed Policy
  • Probability of a U.S. Recession
• Key Takeaways (44:36)
  • Employment
  • Inflation
  • Fed Policy
  • Economic Growth
  • Markets
  • Allocation

Investment Markets (0:43)

All graphs and charts are for illustrative purposes only.

In this section, Matthew examines the shifting dynamics in investment markets during Q3 2024, highlighting changes in market leadership, the performance of the Magnificent 7 stocks, and notable trends in value versus growth investments.

1. International stocks outperformed U.S. stocks in Q3, with emerging markets leading at 8.6% returns, followed by EAFE at 7%, while the Russell 3000 returned 6%.
2. Year-to-date, U.S. stocks maintained their leadership with the S&P 500 up 22% and Russell 3000 at 20%, while international markets showed improved performance with emerging markets at 16.8% and EAFE at 12.9%.
3. The VIX showed increased volatility in August due to disappointing employment data revisions, but settled closer to its average of 15 by quarter-end at 16.7.
4. Real estate emerged as the top performer for the quarter, boosted by falling mortgage rates, while commodities struggled with nearly flat returns at 0.7%.
5. Value stocks outperformed growth stocks for the first time since Q4 2022, showing consistency across all market caps in both Russell 1000 and 2000 indices.
6. The Magnificent 7 stocks underperformed the remaining 493 S&P 500 stocks for the first time in two years, appreciating 5% compared to 7% for other stocks, though they remain up 44% year-to-date versus 17% for others.
7. Index concentration showed slight improvement, decreasing from 36% to 34% for the top holdings, with expectations for further normalization as earnings growth converges between the Magnificent 7 and other companies.

U.S. Economy (15:56)

All graphs and charts are for illustrative purposes only.

This section covers key economic indicators including inflation metrics, employment trends, Federal Reserve policy decisions, and recession indicators, highlighting both challenges and positive developments in the economy. Q3 2024 overall takeaways for employment, inflation, Fed policy, economic growth, market trends, and asset allocation recommendations.

1. Inflation continued to trend toward the Fed's 2% target, with headline PCE at 2.1% and core PCE at 2.65%, while CPI showed slightly higher readings at 2.5% headline and 3.25% core.
2. Core services, particularly shelter costs (comprising 36% of CPI), remained a sticky point for inflation, while energy prices showed deflationary trends, with gasoline down 15.3% year-over-year.
3. The current inflation decline represents the largest drop in 60 years not associated with a recession.
4. Employment showed cooling trends with job openings declining and unemployment rising to 4.1%, though still below the historical average of 4.72%.
5. The Fed initiated its easing cycle in September with a 50 basis point rate cut, with market expectations for two additional 25 basis point cuts in November and December.
6. GDP showed resilience with 3% growth in Q2 and 2.8% in Q3, supported by strong personal consumption growth of 3.7%.
7. Traditional recession indicators showed warning signs, but other metrics including corporate profits, cyclical sector health, and business cycle analysis suggested the economy remains in early late-stage rather than pre-recession.

Key Takeaways (44:36)

All graphs and charts are for illustrative purposes only.

Q3 2024 overall takeaways for employment, inflation, Fed policy, economic growth, market trends, and asset allocation recommendations.

Employment

• Employment has been softening but represents normalization rather than collapse
• Job openings trending downward but still elevated above historical averages
• Unemployment rate increased to 4.1% but remains below the long-term average of 4.72%

Inflation

• Continues trending toward Fed's 2% target with PCE at 2.1% and core PCE at 2.65%
• Core services, especially shelter costs (36% of CPI), remain sticky
• Energy prices showing deflationary trends with gasoline down 15.3% year-over-year

Fed Policy

• Initiated easing cycle in September with 50 basis point cut
• Markets expect two additional 25 basis point cuts in November and December
• Fed shows more concern about employment deterioration than rising prices

Economic Growth

• GDP showing resilience with 2.8% growth in Q3, supported by strong consumer spending at 3.7%
• Traditional recession indicators flashing warnings but may be "crying wolf"
• Economy appears to be in early late-stage cycle rather than pre-recession
• No concerning excesses in cyclical sectors that typically precede recessions
• Corporate profits remain strong, unlike typical pre-recession periods

Markets

• Value stocks outperformed growth for first time since Q4 2022
• Magnificent 7 underperformed remaining S&P 500 stocks for first time in two years
• Index concentration improved slightly, declining from 36% to 34% for top holdings
• Earnings growth expected to converge between Magnificent 7 and other companies by end of 2025

Asset Allocation

• Late-stage cycle suggests similar returns across broad asset classes
• Recommend minimal allocation bets given current market phase
• Consider gradual shift toward fixed income overweight to prepare for eventual recession
• Maintain neutral positioning across major asset classes in near term

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