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.
- 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%.
- 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%.
- 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.
- 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%.
- 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.
- 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.
- 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.
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.
- 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.
- 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.
- The current inflation decline represents the largest drop in 60 years not associated with a recession.
- Employment showed cooling trends with job openings declining and unemployment rising to 4.1%, though still below the historical average of 4.72%.
- 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.
- GDP showed resilience with 3% growth in Q2 and 2.8% in Q3, supported by strong personal consumption growth of 3.7%.
- 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.
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%Here, Matthew shares his
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
Not an offer: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Instrumental Wealth or consult with the professional advisor of their choosing.Forward-looking statements: Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.Past Performance: There is no guarantee that the investment objectives will be achieved. Moreover, the past performance is not a guarantee or indicator of future results.
Certain information contained herein has been obtained from third party sources and such information has not been independently verified by Instrumental Wealth LLC. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Instrumental Wealth LLC. or any other person. While such sources are believed to be reliable, Instrumental Wealth LLC. does not assume any responsibility for the accuracy or completeness of such information. Instrumental Wealth LLC. does not undertake any obligation to update the information contained herein as of any future date.
Specific investments described herein do not represent all investment decisions made by Instrumental Wealth. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future.