Economic Update: A Review of Third Quarter 2024

Three months ago, we were looking at what appeared to be a slowing economy. At the time, after U.S. GDP grew at a 1.4% annualized pace in first quarter 2024, the Atlanta Fed’s GDPNow model was predicting sub-2% growth for the second quarter as well.

Instead, our economy continues to show resiliency, as it generally has over the last few years. Despite the lower predictions, U.S. GDP came in at 3% growth during the second quarter. Both consumer spending and business investment have been robust. As of this writing, the GDPNow model still projects a strong 2.5% annualized GDP growth for the third quarter, and Deloitte predicts 2.7% total growth for all of 2024 in their Q3 United States Economic Forecast.

The U.S. stock market has rallied as a result of this change of sentiment. The S&P 500 gained nearly 6% during the third quarter, continuing what has already been a very strong year.

U.S. Economy

After peaking at 9.1% year over year in June 2022, inflation has been on a choppy but downward trend since then. The most recent trailing 12-month reading in August was 2.5%. We are now getting close to the Fed’s long-term target rate of 2%, which likely contributed to the first interest rate cut in four years.

After a cut of 50 basis points in the September meeting, the current Fed rate range now sits at 4.75% – 5%. This compares to the Fed’s prediction for the long-term range of 2.75% – 3%. The futures market surprisingly predicts we will get all the way to that long-term range by this time next year. The Fed itself expects the reduction to be a little more gradual, although it’s calling for a range of 3.25% – 3.5% 12 months from now. Either way, we should expect numerous additional rate cuts in the near future.

The jobs market is strengthening, which would give the Fed room to go a little slower with rate cuts than the market expects. July, August and September have seen 144,000, 159,000 and 254,000 jobs created respectively. As of this writing, the unemployment rate now stands at 4.1%.

Real consumer spending is strengthening as well. In July, real personal consumption expenditure rose 0.5% following a 0.3% increase in June. For the second quarter 2024, overall PCE grew by an annualized 2.9%. Spending on durable goods also increased 4.9% during the second quarter after falling 4.5% in the first quarter. This increased spending on durables can signify increasing consumer confidence.

However, that sign of increasing consumer confidence hasn’t completely followed through to the monthly University of Michigan Consumer Sentiment reading, which registered 70.1 in September. This survey reading has been trending up over the last few months, but it is still well below the 100-level normalized in December 1964.

International Economy

The European Central Bank is expected to follow the Fed’s lead and also cut rates at the next meeting in October. Other central banks will also likely be on the same path soon. Regardless, as central banks further trim rates, note that we are unlikely to return to the ultra-low figures seen following the 2008 financial crisis and continuing through the pandemic.

The Euro area has recently seen a substantial weakening of its economic outlook. The region’s composite purchasing managers’ index dropped below 50 in September. Readings below 50 indicate expected future economic contraction. The region has been in expansion territory previously, but that now appears to have only been a temporary boost from the Olympics in Paris.

The negative outlook is attributable to French political turmoil, a general manufacturing sector malaise and a sluggish German economy. However, note that the euro-area periphery economic expectations in other countries are higher than Germany and France.

Markets

By any measure, equity markets have had a very good year thus far. U.S. large-cap equities, as represented by the S&P 500 Index, gained 5.89% during the quarter. They are now up 22.08% total for the year. Developed international equity markets, as represented by the MSCI EAFE Index, were up 7.26% for the quarter. That index is now up 12.99% year-to-date. The MSCI Emerging Markets Index also posted strong gains, finishing the quarter up 8.72% and the first nine months of the year up 16.86%.

Bond indexes posted a very good quarter as well, as the prospect for near-term Fed rate cuts became clear. The Barclays U.S. Aggregate Bond Index was up 5.20% during the third quarter. The Barclays Global Aggregate Bond Index was up 4.24%. The Barclays U.S. Inflation-Linked Bond Index was up 4.12% during the period. For the year thus far, the three indexes are now up 4.45%, 4.38% and 4.85% respectively.

Commodities have lagged as inflation has slowed. The Dow Jones UBS Commodity Index gained a scant 0.68% during the quarter and is now up 5.86% year-to-date. On the other hand, the Wilshire REIT Index surged during the third quarter, erasing prior slight losses. That index finished the quarter up 15.19% and is now up 14.88% total for the year.

Outlook

Historically, the U.S. stock market has tended to perform well in the 12 months following an initial Fed rate cut. This tends to be true as long as the U.S. economy does not subsequently go into recession. On that basis and given there are no immediate signs that a recession is imminent, this seems a good time to be invested in equities.

Note, however, that markets have been so strong over the last couple years that many stock valuations appear to be a little stretched, particularly larger growth stocks in the U.S., possibly making it a good time to somewhat diversify from that area of the market. When investor sentiment shifts, markets can change quickly. On the other hand, earnings growth is what matters in the end. If these companies end up fulfilling their lofty earnings expectations, then their current valuations will have been justified.

Additionally, it would not be surprising to see a pickup in market volatility as we get closer to the U.S. election. Historically, this volatility tends to occur in the later part of October and continues for a few weeks beyond election day. 

As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon.

Bloomberg US Aggregate Bond Index: The Aggregate Bond Index is a broad-based benchmark that measures the investment grade, dollar-denominated, fixed-rate taxable-bond market including Treasuries and government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS. The Aggregate rolls up into other Bloomberg flagship indices such as the multi-currency Global Aggregate Index and the Universal Index, which includes high-yield and emerging markets debt. The Aggregate Index was created in 1986, with index history backfilled to Jan. 1, 1976. 

Bloomberg Global Aggregate Bond Index: The Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the Aggregate ($300 million USD), the Pan-European Aggregate ($300 million EUR) and the Asian-Pacific Aggregate Index ($35 billion JPY). In addition to securities from these three benchmarks (94% of the overall Global Aggregate market value as of Dec. 31, 2010), the Global Aggregate Index includes Global Treasury, Eurodollar ($300 million USD), Euro-Yen ($25 billion JPY), Canadian ($300 million USD equivalent) and Investment Grade 144A ($300 million USD) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Index family includes a wide range of standard and customized sub-indices by liquidity constraint, sector, quality and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to Jan. 1, 1990. 

Bloomberg Global Inflation-Linked Index: The Global Inflation-Linked Index (Series-L) includes securities that offer the potential for protection against inflation as their cash flows are linked to an underlying inflation index. All securities included in the index must be issued by an investment-grade-rated sovereign in its local currency. The list of eligible currencies is the same set of currencies eligible for inclusion in the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) represents a stand-alone multi-currency index exposed to the real yield curve for each relevant currency. As such, the index does not contribute to the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) was created on Oct. 31, 1997. 

S&P 500^® Index: This is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard & Poor's chooses the member companies for the 500 based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. The returns presented for the S&P 500 are total returns, including the reinvestment of dividends each month. 

MSCI EAFE Index: The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the U.S. and Canada. As of April 2002, the MSCI EAFE Index consisted of these 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. 

MSCI Emerging Markets Index: The MSCI EMF Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of April 2002, the MSCI EMF Index consisted of these 26 emerging-market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. 

Bloomberg Commodity Index: As part of the DJ-UBSCI℠ family, the Bloomberg Commodity Index℠ is calculated on an excess-return basis and the Bloomberg Commodity Index Total Return℠ is based on the BSCI℠. The former reflects the return of underlying commodity futures price movements only, while the latter reflects the return on fully collateralized positions in the underlying commodity futures. 

Wilshire US REIT Index: Introduced in 1991, the Wilshire REIT index is intended to broadly measure the performance of publicly traded real estate equity securities. The index is market-capitalization weighted of publicly traded real estate securities such as real estate investment trusts, real estate operating companies and partnerships. The index is composed of companies whose charters are the equity ownership and operation of commercial real estate.

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