Markets were relatively stable during the final full trading week of Q3 2024. There were a few notable events this week. Let’s take a quick look back and then turn our attention to the final three months of 2024.

Chinese Stimulus

It’s no secret that China, the world’s second-largest economy, has been a laggard in recent years as it has struggled thru a so-called “deflationary funk.” The country has been unable to recover post-pandemic in the same manner as the US and other large scale economies have.

The Chinese government and central bank took bold actions early this week to attempt to turn the tide and hopefully boost their economy and stock market as a result. China announced its biggest stimulus measures since the pandemic that included a reduction in short-term interest rates, plans to reduce reserve requirements for banks to the lowest level since 2018, and a slew of other plans (such as measures to shore up the nation’s troubled property sector and additional liquidity support from the central bank).

These measures show how seriously Chinese officials are taking their country’s slowing growth. The policy barrage likely puts China’s annual 5% growth goal back within reach but doubts remain whether it was enough to break China’s longer-term deflationary pressure and entrenched real estate crisis.

Investors initially seemed encouraged by the news as Chinese equities rallied and ancillary sectors/companies in US markets (such as commodities, casinos, luxury brands, and retailers with China exposure), rallied on the news. While it is an encouraging step taken by a very important global economy, we remain cautious given the backdrop of the Chinese government and the underlying lack of corporate governance and financial transparency within its markets.

US GDP Rallies On

More good news for the bulls came on Thursday when the US Gross Domestic Product (GDP) report reaffirmed the strength in the US economy. US GDP for the second quarter came in at a 3% annualized pace (slightly ahead of 2.9% estimate and well ahead of 1.4% rate in Q1 2024).

These estimates seems to appease fears from earlier this month that the US economy was on the brink of a recession (which surfaced as the labor market started to show weakness). These growth rates suggest that the US economy continues to advance at a decent pace and is unlikely to deteriorate materially in the near term, especially as the Federal Reserve is becoming more accommodative.

Dual Mandate Update

Two more data points this week will provide updates on the Fed’s dual mandate. A labor report (US Labor Departments unemployment claims for last week) was released, showing 218,000 claims versus 223,000 expected. This was the lowest level of claims since May and showed reasonable market strength (but not too much strength, which is key to keeping inflation contained). Inflation will get its moment on Friday (after this is published) when August PCE and September University of Michigan sentiment and inflation expectations will be announced.

Heading Towards Year-end

Early next week, we will enter the final quarter of 2024. It’s safe to say that this year has surprised almost all investors on the upside. Entering 2024, there was persistent discussion about stubborn inflation, burdensome elevated interest rates, slowing growth, and a whole host of other concerns. And yet, despite that, fixed income and equity markets have performed exceptionally well.

We remain optimistic for the remainder of the year for three main reasons:

1. Historical reaction to Fed cuts – There have been seven past instances when the Federal Reserve has cut rates for recalibration reasons (ie: cutting to bring rates back to target level and NOT for recessionary/emergency reasons). In 100% of those instances, equity markets were higher 3 and 6 months later. This makes intuitive sense. Provided that rate cuts are not in reaction to a weakening economy or another exogenous shock (like COVID or the great financial crisis) but are rather are focused on bringing rates in line with long-run expectations, falling rates should (and likely will) benefit equities as well as fixed income securities
2. Growth remains strong – This week’s GDP report gives further credence to our belief that the US economy (and the US consumer that plays such a large part in the US economy) remains in good shape. Falling interest rates should only lend further support of an already sufficient growth trajectory
3. Election uncertainty will be resolved – Markets and investors thrive on certainty and the US election cycle coming up in early November is anything but certain as of today. Investors have been derisking to some extent into the election (as shown by stable margin levels, which would be rising if investors were “all in”). It’s highly likely that many investors are waiting to deploy cash until the election is resolved – one way or the other. Once that is behind us, it’s our expectation that cash will be deployed (especially as rates available on cash fall further and look less attractive on a relative basis)

With that said, it has been an exceptionally strong year, far outpacing any return expectations across asset classes. We are using this as an opportunity to pare back resulting concentrations, rebalance back to target allocations, and secure upcoming distribution needs in cash & cash equivalents. You may wish to consider doing some of the same as you coordinate with your advisory team.

A quote I’ve been thinking of a lot lately is from one of my favorite thinkers Scott Galloway, who says “nothing is ever as good or as bad as it seems.” As investors, we’ve certainly been on both sides of that sentence in 2024 and I’m sure we may just find ourselves in one or both of those extremes again before we say farewell to 2024. As always, in good times and in bad, keep a level head and an open mind.

Onward we go,