S&P 500 Ends Q3 2024 at Record Highs

Major US stock indices S&P 500 (ES) and Dow Jones (YM) extended gains to new records on Monday, 30 September 2024, after rising by 0.4% and 0.1%, respectively. The tech-heavy Nasdaq (NDAQ) also experienced gains of 0.4%.

All three indices inched higher in a surprise end-of-quarter session, considering prior remarks of Fed Chair Jerome Powell during an appearance at the National Association of Business (NBE), where he said that the Fed will take a less aggressive path to cutting interest rates.

Following Monday’s events, the market now prices in lower interest rate cuts in November, December and January, down to 34, 69 and 100 basis points, respectively, from 38, 76 and 110 basis points.

Powell Fails to Dampen Optimism

Fed Chair Jerome Powell said on Monday that the Fed is not “in a hurry” to cut rates at the pace it did in its September meeting, indicating just two more interest rate cuts through the end of the year as projected in the dot-plot matrix. His comments came amidst noted ongoing economic growth, bolstered by recent data revisions in income spending and savings estimates, and faster-than-expected growth in gross domestic income (GDI) reducing potential downside risks to the economy. GDI is similar to GDP but with income instead of product as an output.

However, the Fed chair highlighted that the pace of interest rate cuts would hinge on incoming employment figures, including the September Nonfarm payrolls on Friday, 4 October,  and inflation data. While headline inflation has fallen to 2.2%, the core inflation rate, which excludes volatile food and energy prices, stood high at 2.7% in August, still distant from the Bank’s 2% inflation target.

FOMC Members at Odds on Rate Cuts

Powell’s comments contrast with those of other Fed officials, including Atlanta Fed President Raphael Bostick and Chicago Fed President Austan Goolsbee. While the Fed Chair downplayed the need for a 50 basis point cut in 2024, Goolsbee believes the Fed should not wait for a weaker job market to act. On the other hand, despite being more willing to cut if economic conditions weaken, Bostic supports an “orderly” easing of just a single cut for the year, allocating more weight to labour market changes.

JP also referred to “two-sided” risks, referring to the balance between the need to cut rates further and other challenges, such as potential risks stemming from the labour market. This makes Friday’s Nonfarm Payroll release all the more important.  If it shows a weakening in job growth or a rise in unemployment, the Fed might need to cut rates more aggressively to stimulate economic activity.

The previous Nonfarm Payroll (NFP) report missed expectations to 142,000 jobs and included downward revisions for the months from May to July, with a similar increase of 145,000 expected in September. Notably, employment in August declined mostly in the manufacturing sector.

Q4 Sentiment Intact Despite Uncertainties

Despite Powell's cautious stance on aggressive rate cuts on Monday, the market's immediate downside reaction was only brief, suggesting investor optimism may be driven by improving economic data and expectations that the Fed will cut rates for the remainder of the year.

Additionally, institutional investors such as mutual funds and pension funds often rebalance their portfolios at the end of each quarter. This can lead to increased buying activity in stocks as they engage in "window dressing," buying well-performing stocks to make their portfolios appear more attractive in client reports

With September out the way with big gains, which is typically labelled as the worst month of stock performance, investors seem to feel confident since the Fed’s “jumbo” rate cut earlier in the month. The S&P gained 5.4% in the last quarter and the Nasdaq 3%, while the Dow Jones led at an 8.2% increase. However, the S&P 500 marked its best year-to-date (YTD) performance in nearly 30 years in September, up by over 20%.

Analysts remain optimistic that the Fed can achieve a soft landing following a strong Q3 after the Atlanta Fed’s GDPNow estimated annual growth of 3.1%. The upcoming US elections and geopolitical tensions in the Middle East and Ukraine could also heighten volatility, which has historically led to higher returns for the S&P 500 of 16% for the six months forward compared to just 5% in calmer environments.

Wall Street will closely monitor labour markets, with a particular focus on the weekly initial unemployment claims remaining stable at around 225,000, or not exceeding the 260,000 threshold. However, the performance of sectors could also influence the performance of the indices, along with earnings reports. Notably, consumer staples and healthcare perform well during an easing monetary policy environment. Some companies in these sectors that could stand to benefit include Costco (COST), Walmart (WMT) and Target (TGT), and Johnson & Johnson (JNJ), CVS Health (CVS) and UnitedHealth Group (UNH), respectively.

Conclusion

Despite Powell’s remarks indicating a slower pace of interest rate cuts, major US stock indices closed the quarter with impressive gains, driven by positive economic indicators and the expectation of continued, albeit measured, monetary easing. 

With volatility around the corner amid geopolitical tensions and the upcoming US elections, attention will remain on labour and inflation data to gauge how much more the S&P 500 could rise. As such, economic data may shift expectations for substantial or less aggressive rate cuts and dampen investor optimism in Q4. 

Nonetheless, the Fed’s path forward sees rate cuts, and sectors like healthcare and consumer staples have historically performed well during such times.