Current market environment performance of dynamic, risk-managed investment solutions.
Equity markets continued to rise in the third quarter of 2024, building on the momentum from the first half of the year. Several key factors shaped market price action during this period, including economic data, geopolitical developments, shifting central bank policies, and the continued broadening of the AI-driven rally. Market leadership rotated to small-cap, value, and real estate stocks following the early-quarter sell-off.
Diving into sectors, nine out of 11 generated positive returns and outperformed the S&P 500. The Utilities, Real Estate, and Industrials sectors led in the U.S., while Energy was the weakest sector, followed by Technology and Communication Services.
Inflation concerns resurfaced in early July as energy prices temporarily spiked due to supply constraints and geopolitical tensions in regions such as the Middle East. However, inflation moderated in August, easing investor worries. In response, the Federal Reserve cut interest rates by 50 basis points in September—the first cut since the pandemic—signaling a shift toward a more accommodative monetary policy aimed at supporting growth while controlling inflation.
Foreign markets made little progress, with the MSCI AC World Index ending slightly positive for the third quarter. Late-quarter momentum coincided with better-than-expected economic data and the Federal Reserve’s rate cut. China’s aggressive stimulus package, which included fiscal support and rate cuts, also contributed to late-quarter positive momentum internationally. Toward the end of the quarter, six major central banks cut rates, with the Reserve Bank of Australia being a notable exception. Over the last three months, a net total of 37 central banks have cut rates.
Fixed-income markets rallied in Q3 as the Fed’s rate cut triggered a broad decline in yields. The 10-year U.S. Treasury yield, which peaked in late April, fell over 50 basis points to end the quarter at 3.81%. The Fed’s shift toward a more accommodative monetary policy spurred demand for longer-duration bonds, which outperformed shorter-duration securities due to their higher sensitivity to falling interest rates. The Bloomberg Barclays U.S. Aggregate Bond Index, a bellwether for bonds, gained around 5%. High-yield bonds saw significant inflows as investors sought higher returns in a lower-interest-rate environment. With economic data indicating stabilization, credit spreads tightened, further supporting returns in this asset class. Additionally, corporate credit markets remained robust, supported by strong earnings and low default rates.
Commodities experienced mixed performance during Q3. Gold, a traditional inflation hedge, saw price fluctuations but broke out to the upside toward the end of the quarter, gaining over 13% to register a new high. Central bank purchases, particularly from emerging markets, and investor demand for inflation hedges supported gold prices. Oil prices fluctuated, but weak demand from major economies and concerns over future growth led to a decline by quarter-end, weighing on energy stocks.
From a technical standpoint, the third quarter saw markets move through distinct phases. In July, equity markets consolidated, with trading volume diminishing as investors awaited clarity on inflation and central bank policy. In mid-September, the Federal Reserve’s rate cut sparked renewed buying interest, pushing equity indexes to new highs by the end of September.
Momentum indicators such as the Relative Strength Index (RSI) remained positive throughout the quarter, signaling potential for continued gains. Moving averages showed a strong upward trend, and key support levels held firm during minor pullbacks, reinforcing the broader uptrend. The combination of these technical signals and fundamental catalysts like lower interest rates suggests that the longer-term rally in equity markets could extend into the final quarter of the year.
Performance trends for the quarter
Equity markets saw turbulence from mid-July to early August but continued their longer-term uptrend following encouraging data and the Fed’s rate cut in September. Flexible Plan Investments (FPI) saw pockets of success with its systematic, dynamic risk-managed approach to investment management. After maximum fees, about 86% of its strategies were profitable for the quarter, and most of those with losses were down less than 3% across risk profiles. The top performers tended to be strategies with access to gold in their universes, which were able to capitalize on the resumed upward movements in the yellow metal.
Strategies that struggled for the quarter tended to be rotational equity-based strategies. These strategies can struggle when pullbacks are short and shallow. Algorithms recognized risk entering the markets and responded accordingly. Most models favored a more risk-on positioning once prices reestablished their uptrend in mid-September.
Among FPI’s risk-profiled strategies, there was a positive correlation between risk and return. More aggressive strategies gained more for the quarter, taking advantage of market movements once upward price action resumed. Some rotational risk-profiled strategies outperformed in the more conservative profiles due to risk-management efforts during pullbacks and more reliance on fixed-income in their allocations.