Third Quarter Commentary
In the third quarter, U.S. equity performance was more broadly distributed than in previous quarters, with the equal-weighted S&P 500 (9.6%) and Russell 3000 indices (10.4%) outperforming their market-cap weighted counterparts (5.9% and 6.2%, respectively). The Federal Reserve’s decision to cut rates spurred a risk-on rally, with small caps posting their second-best quarter since Q1 2021. Mega-cap tech names saw a meaningful pullback over the quarter, with only 3 of the “Magnificent 7” (Apple, Meta, and Tesla) posting positive returns.
Both international developed and emerging markets equities posted strong returns for the third quarter, with the announcement of Chinese stimulatory measures fueling an EM rally. The MSCI EAFE returned 7.3% for the quarter, while the MSCI EM index returned 8.7%.
The Federal Reserve cut interest rates by 50 basis points (bps) to a range between 4.75% to 5.00% as inflation showed signs of cooling and concerns around the labor market weakening. Officials’ forecasts suggest an additional one to two rate cuts of 25 bps by the end of 2024. The Bank of Canada cut rates by 25 bps twice during the quarter on the back of slowing inflation and a weaker outlook on the labor market.
U.S. corporate bond spreads in investment grade (92 basis points) and high yield (303 basis points) remained tight during the quarter. Spreads remain well below long-term median levels.
Indicators used to measure U.S. economic activity, such as the ISM Manufacturing and Non-Manufacturing indexes, continued to show mixed signals of contractionary and expansionary activity, respectively, further complicating the inflation and interest rate outlook for the Fed.
To view the third quarter reports, click on the links below: