The third quarter was strong for risk assets and safe havens with U.S. equity markets posting an all-time closing high to finish out the quarter and bonds delivering positive returns, but not without a pickup in volatility at the start. 2024’s stock market rally was thrown off course in late July/early August as investors reacted to a weaker-than-expected jobs report, fueling concerns that a stumbling labor market implied a recession may be looming on the horizon.

After retracing 8.5% by early August, the S&P 500 had just about fully recovered by the end of the month, and subsequently powered to new highs after the Federal Reserve delivered a jumbo 50 basis point rate cut. Overseas, China delivered its largest stimulus since 2015 and Japanese policymakers adopted a less hawkish tone helping fuel strong global equity market returns.

Digging deeper into the performance drivers for the quarter:

Jobs data was noisy, but show a cooling, not crumbling labor market: Following soft July and August employment reports, a pickup in hiring in September helped assuage any concerns the economy was sliding into recession. Jobs data in the fourth quarter are likely to be noisy given turbulent weather across the county, but on balance we expect the unemployment rate to stay near 4%.

The Fed kicked off its rate cutting cycle: The Federal Reserve reduced the Fed funds target rate range by 0.50% to 4.75%-5.00% and indicated gradual rate reductions are expected through 2025. That said, the Fed will have to deliver on its promise, and given the committee’s sensitivity to incoming data, investors would be wise to stay diversified across stocks and bonds.

China delivered a sizeable stimulus package to help support its economy and stock market: The People’s Bank of China (PBOC) and regulators delivered a series of policies mainly targeted at supporting its ailing property market. These measures included rate cuts to lending rates, mortgage rates and facilities to allow institutions to fund stock purchases.

These drivers led to notable third quarter highlights:

• The S&P 500 gained for the fourth straight quarter, making 18 new highs, while small caps logged its second-best quarter since 2021.
• U.S. Treasuries and corporate bonds rallied in the quarter as yields fell. The 2s10s curve flipped positive in early September after being inverted since mid-2022.
• Gold enjoyed its biggest gain since Q1 2016 as faster rate cuts were priced in.
• China stimulus helped propel EM equity returns on the quarter.

So what now for Q4? The good news is that positive expected earnings growth, cooling inflation, easing central banks and firm job creation create a robust backdrop for risk assets. That said, geopolitical risks and election uncertainty will be at the forefront for the rest of the year, suggesting investors should be prepared for a bumpy ride.

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