By John Lau
October 1, 2024 – Markets were volatile in the third quarter as investors faced political turmoil and a slowing of the economy, but the return of Fed rate cuts and solid corporate earnings helped to offset those political and economic anxieties, and the S&P 500 hit another new all-time high and finished the quarter with strong gains.
Markets started the third quarter with a continuation of the first-half rally thanks to good Q2 earnings results and generally solid economic data. However, while the S&P 500 hit a new all-time high in mid-July, the second half of the month proved more volatile. That volatility was driven by an intense rotation within the S&P 500 from the heavily weighted tech sector (more than 30% of the S&P 500) to other, smaller market sectors such as utilities, financials and industrials. The impetus for this dramatic rotation was a combination of profit taking following the substantial AI-driven tech stock rally and a larger-than-expected decline in inflation which caused Treasury bond yields to fall sharply as investors anticipated imminent rate cuts by the Fed. That expectation boosted the economic outlook and caused investors to rotate towards market sectors that benefit more directly from a strong economy. So, while investors didn’t exit the market entirely, the decline in the tech sector weighed on the S&P 500 and was not fully offset by gains in other, smaller market sectors. The S&P 500 finished July well off the mid-month highs.
The late-July volatility continued in early August as a much-weaker-than-expected July jobs report, released on August 2nd, added to economic concerns. The unemployment rate rose to the highest level since November 2021 and investors’ fear of an economic hard landing triggered a sharp, intense decline that saw the S&P 500 fall 3% on Monday, August 5th (source: Yahoo Finance), the worst one-day selloff in nearly two years. However, that decline proved brief as economic data over the next few weeks was generally solid and that helped calm investors’ anxieties. Then, on August 23rd, at the Kansas City Fed’s Jackson Hole Economic Symposium, Fed Chair Powell told markets the “time had come” for the Fed to cut rates. That all but guaranteed a rate cut at the September meeting. That message further fueled the rebound in stocks and the S&P 500 finished August with a 2.3% gain, completing an impressive rebound from early-month weakness.
The rally continued in September thanks to growing expectations for a large Fed rate cut that offset lackluster economic data. Then, on September 18th, the Fed met market expectations and cut rates for the first time in four years and promised additional rate cuts between now and year-end. Investors welcomed this news and the S&P 500 surged to a new high and finished the month and quarter with more solid gains, adding to the strong year-to-date return.
Finally, politics and the looming presidential election did impact markets during the third quarter. Investors started the quarter expecting a Trump victory and Republican control of Congress, based on polling following President Biden’s struggles at the June debate and after the failed assassination attempt on the former president. However, those expectations changed rapidly following Biden’s withdrawal from the race and the nomination of Vice President Kamala Harris. As the third quarter ended, national polls slightly favored Harris while the outlook for the control of Congress remained uncertain.
Will the Port Strike Increase Hard Landing Chances?
Today we may see a dock worker strike that spans from Maine to Texas and you are likely to see some scary headlines about what this might do to the U.S. economy. While clearly a potentially significant event, it is not likely to dramatically increase hard landing chances, although I do think it could impact certain sectors and, down the road, the macro-economic outlook. Here’s why.
What is Happening?
The International Longshoremen’s Association (ILA) has failed to come to an agreement with the U.S. Maritime Association (the group that represents the port operators) on a new labor agreement. As such, a large-scale dockworkers strike that would stretch from Maine to Texas may begin today, which potentially may snarl supply chains and reduce economic activity in the U.S. It would be the first coast-wide dockworkers strike since the 1970s. But would it be a problem for the rally? On the surface, I admit this is a scary economic proposition, as the U.S. economy is already losing steam, the Fed has started cutting rates in response and a labor stoppage at all major East and Gulf Coast ports could 1) exacerbate any economic slowdown and 2) possibly result in supply chain problems that could cause a bounce back in inflation (jeopardizing further rate cuts). But while those outcomes are possible and they would be legitimate negatives, here’s why I believe they are unlikely.
- First, strikes are ultimately temporary and policymakers (including the Fed) generally look past temporary disruptions when making decisions. Here’s what I mean: Let’s say the port strikes make the October and November economic data worse than expected due to supply chain issues and other complications. It will likely be viewed as “strike skewed” and as such, it is not likely to elicit a response from the Fed. Similarly on inflation, we may see a spike in prices (especially local commodity prices) if there are temporary supply disruptions, but the Fed will probably look past that when setting policy. Bottom line, because strikes are ultimately temporary, it’s unlikely any economic weakness or price spike alters the near-term (between now and year-end) chances of a soft landing or more Fed rate cuts. • Second, while clearly a disruption, there are alternative suppliers that companies can use to mitigate the port closures, reducing the impact. An East Coast port closure would clearly complicate the lives of retailers and other importers, but they wouldn’t necessarily be stranded. I say that for several reasons including the fact that 1) the West Coast is much more important from a retail import standpoint (we get most of what’s coming from Asia), and 2) alternatives exist including drawing down existing inventory and finding other means of import including air freight and trucks from Mexico, Canada and other places. Bottom line, they may be more expensive, but retailers and importers have other alternatives to bring their goods to market.
- Third, the last widespread port closure failed to materially impact the economy. From June 2014 to February 2015 the West Coast ports engaged in various forms of a work stoppage and while that impacted some retailers, it didn’t impact the broader economy (as mentioned previously, West Coast ports are more important than East Coast ports, at least to retailers and the consumer economy). Bottom line, the dockworkers strike on the East Coast will generate a lot of worrisome economic headlines about growth and inflation but it’s important to remember that any work stoppage is ultimately temporary, and policymakers and economists know that, and that’s why they generally look past the impacts.
Fourth Quarter Market Outlook
With the start of the Fed’s rate cutting cycle now behind us and the general pace of future cuts now broadly known, focus for the final quarter of 2024 will turn towards economic growth and politics. Given the volatile nature of both, it’s reasonable to expect periods of elevated volatility over the coming months.
Starting with economic growth, expectations for aggressive Fed rate cuts helped investors look past some soft economic reports in Q3, especially in the labor market. However, with those rate cuts now behind us, we should expect markets to be more sensitive to any disappointing economic data, especially in the labor market. Bottom line, with the S&P 500 just off record highs, the market has priced in a soft economic landing, so if the economic data in Q4 is weaker than expected and recession fears grow, that will increase market volatility between now and year-end.
The key report this week is Friday’s jobs report. But while the jobs report is the most-important labor market report this week, the labor data is showing employers have largely ceased hiring; however, they are not actively laying people off. That dynamic is indicative of a soft landing, but it can’t deteriorate and have the data start to show layoffs. Otherwise, rising layoffs will increase hard landing worries and that would be a new, negative influence on stocks. The other two potentially market-moving economic reports this week are the ISM Manufacturing PMI (today) and the ISM Services PMI (Thursday). The September Manufacturing PMI registered 47.2 percent. Although today’s number is a peripheral negative, it is not enough to increase hard landing worries by itself. The bigger issue would appear if the ISM Services PMI drops back below 50 and provides a third month where both PMIs are below that critical 50 level.
Bottom line, with the Fed now in a rate cutting cycle, it’s up to the data to show that they did not wait too long and that a soft landing is still the most likely outcome. As long as the data does show that (in-line with expectations or better) then economic data should support stocks even at these elevated valuations. However, if the data is weaker than expected, look for hard landing worries to rise, sharply, and that’s simply not something that’s priced into stocks (at all) at these levels, so there is real risk to this rally if economic data disappoints.
Politics, meanwhile, will become a more direct market influence as we approach the November 5th election. Depending on the expected and actual outcome, we could see an increase in macro and microeconomic volatility that could impact the broader markets as well as specific industries and sectors. That volatility will stem from the uncertainty surrounding potential future policy changes (or lack thereof) towards important financial and economic issues such as taxes, global trade and the long-term fiscal health of the United States.
Finally, geopolitical risks remain elevated and while the war between Russia and Ukraine and the ongoing conflict between Israel, Hamas and now Hezbollah hasn’t negatively impacted global markets this year, that’s always a possibility and these situations must be consistently monitored as the spread of these conflicts would impact markets, regardless of any Fed rate cuts or election outcomes.
In sum, as we start the fourth quarter the market does face economic, political and geopolitical uncertainties. But market performance has been very strong in 2024; momentum remains decidedly positive, and this market has proven resilient throughout the year. Additionally, current economic data is still pointing to a soft economic landing. Finally, while political headlines may cause short-term investor anxiety and volatility, market history is extremely clear: Over time, the S&P 500 has consistently advanced regardless of which party controls the government and the average annual performance of the S&P 500 is solidly positive in both Republican and Democratic administrations.
So, while there is elevated uncertainty between now and year-end and it’s reasonable to expect an increase in short-term volatility, the fundamental underpinnings of this market remain broadly positive.
At Robertson Stephens, our team understands the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this investment environment. Successful investing is a marathon, not a sprint, and even bouts of intense volatility are unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient and disciplined, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you accomplish your financial goals.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
Fed Rate Cuts and Solid Earnings Overcome Rising Economic Anxiety
By John Lau
October 1, 2024 – Markets were volatile in the third quarter as investors faced political turmoil and a slowing of the economy, but the return of Fed rate cuts and solid corporate earnings helped to offset those political and economic anxieties, and the S&P 500 hit another new all-time high and finished the quarter with strong gains.
Markets started the third quarter with a continuation of the first-half rally thanks to good Q2 earnings results and generally solid economic data. However, while the S&P 500 hit a new all-time high in mid-July, the second half of the month proved more volatile. That volatility was driven by an intense rotation within the S&P 500 from the heavily weighted tech sector (more than 30% of the S&P 500) to other, smaller market sectors such as utilities, financials and industrials. The impetus for this dramatic rotation was a combination of profit taking following the substantial AI-driven tech stock rally and a larger-than-expected decline in inflation which caused Treasury bond yields to fall sharply as investors anticipated imminent rate cuts by the Fed. That expectation boosted the economic outlook and caused investors to rotate towards market sectors that benefit more directly from a strong economy. So, while investors didn’t exit the market entirely, the decline in the tech sector weighed on the S&P 500 and was not fully offset by gains in other, smaller market sectors. The S&P 500 finished July well off the mid-month highs.
The late-July volatility continued in early August as a much-weaker-than-expected July jobs report, released on August 2nd, added to economic concerns. The unemployment rate rose to the highest level since November 2021 and investors’ fear of an economic hard landing triggered a sharp, intense decline that saw the S&P 500 fall 3% on Monday, August 5th (source: Yahoo Finance), the worst one-day selloff in nearly two years. However, that decline proved brief as economic data over the next few weeks was generally solid and that helped calm investors’ anxieties. Then, on August 23rd, at the Kansas City Fed’s Jackson Hole Economic Symposium, Fed Chair Powell told markets the “time had come” for the Fed to cut rates. That all but guaranteed a rate cut at the September meeting. That message further fueled the rebound in stocks and the S&P 500 finished August with a 2.3% gain, completing an impressive rebound from early-month weakness.
The rally continued in September thanks to growing expectations for a large Fed rate cut that offset lackluster economic data. Then, on September 18th, the Fed met market expectations and cut rates for the first time in four years and promised additional rate cuts between now and year-end. Investors welcomed this news and the S&P 500 surged to a new high and finished the month and quarter with more solid gains, adding to the strong year-to-date return.
Finally, politics and the looming presidential election did impact markets during the third quarter. Investors started the quarter expecting a Trump victory and Republican control of Congress, based on polling following President Biden’s struggles at the June debate and after the failed assassination attempt on the former president. However, those expectations changed rapidly following Biden’s withdrawal from the race and the nomination of Vice President Kamala Harris. As the third quarter ended, national polls slightly favored Harris while the outlook for the control of Congress remained uncertain.
Will the Port Strike Increase Hard Landing Chances?
Today we may see a dock worker strike that spans from Maine to Texas and you are likely to see some scary headlines about what this might do to the U.S. economy. While clearly a potentially significant event, it is not likely to dramatically increase hard landing chances, although I do think it could impact certain sectors and, down the road, the macro-economic outlook. Here’s why.
What is Happening?
The International Longshoremen’s Association (ILA) has failed to come to an agreement with the U.S. Maritime Association (the group that represents the port operators) on a new labor agreement. As such, a large-scale dockworkers strike that would stretch from Maine to Texas may begin today, which potentially may snarl supply chains and reduce economic activity in the U.S. It would be the first coast-wide dockworkers strike since the 1970s. But would it be a problem for the rally? On the surface, I admit this is a scary economic proposition, as the U.S. economy is already losing steam, the Fed has started cutting rates in response and a labor stoppage at all major East and Gulf Coast ports could 1) exacerbate any economic slowdown and 2) possibly result in supply chain problems that could cause a bounce back in inflation (jeopardizing further rate cuts). But while those outcomes are possible and they would be legitimate negatives, here’s why I believe they are unlikely.
Fourth Quarter Market Outlook
With the start of the Fed’s rate cutting cycle now behind us and the general pace of future cuts now broadly known, focus for the final quarter of 2024 will turn towards economic growth and politics. Given the volatile nature of both, it’s reasonable to expect periods of elevated volatility over the coming months.
Starting with economic growth, expectations for aggressive Fed rate cuts helped investors look past some soft economic reports in Q3, especially in the labor market. However, with those rate cuts now behind us, we should expect markets to be more sensitive to any disappointing economic data, especially in the labor market. Bottom line, with the S&P 500 just off record highs, the market has priced in a soft economic landing, so if the economic data in Q4 is weaker than expected and recession fears grow, that will increase market volatility between now and year-end.
The key report this week is Friday’s jobs report. But while the jobs report is the most-important labor market report this week, the labor data is showing employers have largely ceased hiring; however, they are not actively laying people off. That dynamic is indicative of a soft landing, but it can’t deteriorate and have the data start to show layoffs. Otherwise, rising layoffs will increase hard landing worries and that would be a new, negative influence on stocks. The other two potentially market-moving economic reports this week are the ISM Manufacturing PMI (today) and the ISM Services PMI (Thursday). The September Manufacturing PMI registered 47.2 percent. Although today’s number is a peripheral negative, it is not enough to increase hard landing worries by itself. The bigger issue would appear if the ISM Services PMI drops back below 50 and provides a third month where both PMIs are below that critical 50 level.
Bottom line, with the Fed now in a rate cutting cycle, it’s up to the data to show that they did not wait too long and that a soft landing is still the most likely outcome. As long as the data does show that (in-line with expectations or better) then economic data should support stocks even at these elevated valuations. However, if the data is weaker than expected, look for hard landing worries to rise, sharply, and that’s simply not something that’s priced into stocks (at all) at these levels, so there is real risk to this rally if economic data disappoints.
Politics, meanwhile, will become a more direct market influence as we approach the November 5th election. Depending on the expected and actual outcome, we could see an increase in macro and microeconomic volatility that could impact the broader markets as well as specific industries and sectors. That volatility will stem from the uncertainty surrounding potential future policy changes (or lack thereof) towards important financial and economic issues such as taxes, global trade and the long-term fiscal health of the United States.
Finally, geopolitical risks remain elevated and while the war between Russia and Ukraine and the ongoing conflict between Israel, Hamas and now Hezbollah hasn’t negatively impacted global markets this year, that’s always a possibility and these situations must be consistently monitored as the spread of these conflicts would impact markets, regardless of any Fed rate cuts or election outcomes.
In sum, as we start the fourth quarter the market does face economic, political and geopolitical uncertainties. But market performance has been very strong in 2024; momentum remains decidedly positive, and this market has proven resilient throughout the year. Additionally, current economic data is still pointing to a soft economic landing. Finally, while political headlines may cause short-term investor anxiety and volatility, market history is extremely clear: Over time, the S&P 500 has consistently advanced regardless of which party controls the government and the average annual performance of the S&P 500 is solidly positive in both Republican and Democratic administrations.
So, while there is elevated uncertainty between now and year-end and it’s reasonable to expect an increase in short-term volatility, the fundamental underpinnings of this market remain broadly positive.
At Robertson Stephens, our team understands the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this investment environment. Successful investing is a marathon, not a sprint, and even bouts of intense volatility are unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient and disciplined, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We thank you for your ongoing confidence and trust. Please rest assured that our entire team will remain dedicated to helping you accomplish your financial goals.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Our clients rely on us for timely information, and our job is to deliver.
Disclosures
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2024 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.
Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Robertson Stephens Wealth Management, LLC and Fortune Financial Services, Inc. are separate entities and are not affiliated.
For information about Robertson Stephens, go to www.rscapital.com.
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