Market insight – Q3 overview
In Q3 the combination of interest rate cuts and growing profits provided a positive backdrop for both growth and defensive assets. It ended with strong returns across most major asset classes, despite several spells of market volatility.
Economic review and outlook
US GDP growth was still running around 2-3% into Q3. Although some leading indicators are starting to show signs of easing, there is still little evidence that the economy is on the verge of recession. Surveys indicate that economists are actually raising their forecasts for US GDP growth in 2024 towards 2.5%.
Over the third quarter, inflation trends remain unchanged in most countries with a slow deceleration in headline inflation, and whilst unemployment rates have started to increase in most economies, the uptrend remains moderate. One important factor supporting the forecasts of lower inflation is the oil price, which is back around $75 per barrel. This reflects the weakness in the Chinese economy and the lack of action from OPEC on output. So far, Middle Eastern tensions have not had a major impact.
The US Federal Reserve surprised many in the markets by cutting rates by 0.5% to 5.0% in September, bolstering arguments for a soft-landing next year. The looming US election means a further cut before December seems unlikely, however.
The European Central Bank (ECB) also delivered its second rate cut in September taking interest rates to 3.5%, whilst in the UK, the Monetary Policy Committee is expected to act again in November, after embarking on its own easing cycle, with a 25 bps cut at its August meeting. A gradual approach to easing policy is expected against the backdrop of the Budget on 30th October.
Growth asset summary
Whilst the Fed’s latest rate cut has helped push the major US market to record highs, the composition of the market will need careful attention. One of our themes this year has been a broadening of returns, and this is starting to play out in the States. The classic playbook, when rates are coming down, is to buy stocks in sectors that are considered defensive, such as consumer staples and health care, or shares of industries that pay big dividends, like utilities.
Asia ex-Japan was the top performing major region as it rallied strongly towards the end of September, after Chinese policymakers announced a package of new stimulus measures, giving a positive message to financial markets that the government stands ready to support the Chinese economy and its markets.
Factor performance
The Value and Small Cap factors were the standout performers over the third quarter of 2024. With a broadening of returns emerging in the US, this saw the Growth and Momentum factors make the least headway in comparison.
Defensive asset summary
Bond yields were driven by a combination of interest rate cuts in the major economies, expectations of more to come in 2025, generally lower headline inflation, and lower oil prices reflecting the slowdown in the Chinese economy. The end result has been US, UK and German bond yields are lower than a year ago. Positive corporate news continued to support investment grade pricing.
Market insight summary
Recent volatility in stock markets shows investors are well aware of just how much rests on a soft economic landing. Positive profits growth and lower interest rates remain key drivers as we enter the fourth quarter. There will likely be more volatility ahead, with November’s US election one of several potential catalysts. Therefore, maintaining a balance between risk and defensive assets remains a sensible strategy, particularly as the correlation between equities and bonds have diverged once again back towards what has been historical norms.
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Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
