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Welcome to the fall edition of LVW’s The Serious Investor.
Market dynamics shifted notably in the third quarter of 2024, as expectations for interest rates changed and central banks became more accommodative.
The Federal Reserve cut its target benchmark rate by 50 basis points in September, a larger reduction than many observers expected. This move, along with indications of further easing, spurred a broad rally across global equity markets and weakened the U.S. dollar. Developed-economy currencies rallied by an average of 5.5% against the dollar during the third quarter.1
This environment particularly favored non-U.S. stocks, with the MSCI All-Country World ex-U.S. Index rising 7.7% in Q3, surpassing the S&P 500’s 5.5% gain. European equities performed well in dollar terms due to currency appreciation, while emerging markets received a late boost from China’s announcement of aggressive fiscal and monetary stimulus. Rising stock prices and tight credit spreads suggest markets think imminent recession is unlikely.
Global equities posted solid gains for the nine months through September, despite initial concerns about stubborn inflation and high interest rates. The MSCI All-Country World Index rose 17.5%, with the S&P 500 advancing 20.8% and the tech-heavy Nasdaq Composite gaining 21.2%. In the U.S., growth stocks generally outperformed value stocks, with the “Magnificent Seven” tech giants continuing to lead the market. Non-U.S. stocks gained 12.1% in dollar terms,2 trailing major U.S. indices but generating strong growth nonetheless. Chinese equities stood out among major markets, rebounding from a weak 2023 to post a 25.5% gain for the first three quarters of the year, with most gains occurring in the third quarter.
Several major central banks, including the U.S. Fed, the European Central Bank and the Bank of England, adopted less-restrictive monetary stances.3 That shift has been a key driver of market performance in 2024, supporting both equities and bonds while exerting pressure on the U.S. dollar. In the bond market, the yield on the 10-year U.S. Treasury declined 13 basis points, reaching 3.75% by the end of September. The Bloomberg Global Treasury Index for 7-to-10-year maturities returned 2.7% year to date.
Commodities experienced mixed performance. Brent crude oil prices declined 11% in September to around $72 per barrel. Gold prices reached a historic high of $2,661 per ounce following the Fed’s rate cut in September.
Our portfolio positioning is guided by our disciplined investment process. Evaluating market conditions through the lenses of valuation, growth and liquidity leads us to the following perspective:
Valuation: Between average and expensive
The S&P 500’s valuation is above historical averages, reaching levels comparable to the dot-com era and post-COVID period.4 Elevated benchmark valuations are largely due to the influence of the Magnificent Seven stocks—Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla—which reported significant earnings growth in the second quarter and are projected to have continued this trend in the third quarter.5 U.S. small-cap stocks and international equities appear more reasonably priced relative to history.
Growth: A slowing expansion
Year-over-year earnings growth for the S&P 500 is projected to slow to 4.2% for the third quarter but remains on track for five consecutive quarters of growth.6 Consumer spending increased slightly less than expected in August but remained solid overall.7 U.S. GDP continues to exceed historical trends.8 Globally, several major central banks have begun lowering rates while world GDP growth expectations hold steady at approximately 2.7%.9
Liquidity: Interest rates remain elevated but are expected to decrease further
The Fed’s September rate reduction was one of the most anticipated in history, and numerous global central banks cut rates simultaneously. Large deficit spending continues to provide fiscal stimulus.
Positioning: Cautiously optimistic
The U.S. equity market broadened during the third quarter as the equal-weighted S&P 500 outperformed its capitalization-weighted counterpart—a positive sign given recent market concentration among a few companies. We exit the third quarter with strong year-to-date performance across most financial assets. The fourth quarter is often the strongest quarter for U.S. stocks, but investors should be prepared for potential volatility due to geopolitical tensions and upcoming elections.
Despite elevated valuations and slowing growth in U.S. stocks, central bank rate cuts and strong corporate earnings lead us to maintain our optimistic outlook. Historically, markets tend to rise during the 12 months after an initial Federal Reserve rate cut.10
We appreciate your continued trust and confidence in LVW Advisors.
Sources:
1 Bloomberg, September 30, 2024.
2 Bloomberg, September 30, 2024.
3 New York Times, September 18, 2024.
4 J.P. Morgan Asset Management, Guide to the Markets, September 30, 2024.
5 J.P. Morgan Asset Management, Guide to the Markets, September 30, 2024.
6 FactSet, October 4, 2024.
7 Reuters, September 7, 2024.
8 J.P. Morgan Asset Management, Guide to the Markets, September 30, 2024.
9 Goldman Sachs, Economic Forecasts Overview, October 6, 2024.
10 Bloomberg, September 30, 2024.
Disclaimer: This material is provided by LVW Advisors (“LVW” or the “Firm”) for general informational and educational purposes only. LVW Advisors is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not constitute an endorsement of LVW Advisors by the SEC nor does it indicate that LVW Advisors has attained a particular level of skill or ability. Investing involves risk, including the potential loss of principal. Past performance may not be indicative of future results, and there can be no assurance that the views and opinions expressed herein will come to pass. No portion of this commentary is to be construed as a solicitation to effect a transaction in securities, or the provision of personalized tax or investment advice.
Certain of the information contained in this report is derived from sources that LVW believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The information in these materials may change at any time and without notice.
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