In today’s blog, I’m going to review detailed information looking back at Q3’s market, as noted by Dimension’s Quarterly Review. But first, I’ll review three takeaways from July through September.
Key Takeaways
Takeaway #1
The S&P 500 hit record highs, while the tech heavy NASDAQ lagged the broader market.
Takeaway #2
The Fed lowered interest rates by half a percentage point, its first reduction since 2020.
Takeaway #3
Small cap stocks outperformed large caps, and value stocks beat growth for the quarter.
U.S. stocks built on a strong first half with many of the market indices at or at close to record levels as the third quarter neared an end. But those gains came amid a spike in volatility unseen since the COVID pandemic.
Fulfilling expectations that had been building for months, the U. S. Federal Reserve in September cut interest rates. Another thing investors haven’t seen since 2020 is core inflation eased. Number three, developed equity markets outside the U. S. rose, and emerging markets were slightly higher for the quarter.
In the bond market, U. S. Treasuries posted price gains, sending the benchmark 10-year yield below 4%. The Fed’s cut to the federal fund rate by half a percentage point, to the 4.75% to 5% range, came on September 18th. Policymakers cited the uncertain economic outlook and higher employment rate is part of the reasoning for lowering that rate by a half a point instead of a quarter point.
It was the first rate cut since March 2020’s COVID related market turmoil. The move came after inflation hit its lowest level since 2021, with the August Consumer Price Index, which excludes more volatile food and energy items, showing prices rose 3.2%.
Aside from a brief downturn in April, stocks had trended up for much of the year, but in early August and again in early September, major stock indices sank. They recovered losses both times, and they were higher as they neared the quarter’s end, helped by a rise after the Fed’s move. The S&P 500 rose 4.8% for the quarter.
As of September 20th, the technology heavy NASDAQ lagged behind the broader market, gaining 1.4%. Nvidia and the other Mag 7 Stocks were hit especially hard during the August declines, collectively losing about 1.3 trillion in market value at one point before rebounding. Shares of Nvidia had risen sharply this year amid strong demand for its computer chips, which are used to power cutting edge AI applications.
In late August, the company reported second quarter revenue of 30 billion, up a whopping 122% from a year earlier. Despite this, Nvidia’s share price declined following its earnings announcement. And while this may seem counterintuitive, it could indicate huge earnings growth that was already priced in by the market. This is further evidence that high expectations for Nvidia and other Mag 7 Companies could mean it’s harder for them to impress investors in the future.
Treasury saw their longest monthly winning streak in three years as UF government bonds posted a fourth month of gains in August. Prices continued to rise in September, sending yields lower with the benchmark 10 year declining to 3.73% as of September 20th, more than a percentage point off its recent peak in October 2023.
U.S. Treasury yields decreased across the curve and the 10-year yield rose above the two year. The reverse, a yield curve inversion, had been the case for just over two years.
Vigor in Value
Globally, value stocks and small cap stocks outperformed their growth and large counterparts during the third quarter. Through September 20th, value stocks, or those with low relative prices, outdid growth stocks by 5.4 percentage points.
Small cap stocks also shine, outperforming large cap equities by 2.4 percentage points as of September 20th. However, high profitability stocks lag low profitability stocks by 2 percentage points in developed markets and 1. 4 percentage points in emerging markets as of August 31st, the latest data available.
Value stocks were the winners versus growth stocks as the latter underperformed the broader market, but that dichotomy has not been the norm. Between 1927 and 1923, there were 58 years when value stocks outperformed the broader market. In fact, growth’s return was negative in only 17 of those years. On the other hand, value’s average return in years where the value premium was positive markedly exceeded its long run average return.
So, in other words, value stocks have posted strong relative returns, not only because growth stocks fell, but also because value delivered a strong absolute performance. This is a good reminder of the importance on focusing on the premiums over the long run and avoiding the temptation to view one in relation to the performance of another.
Eyes on November
Amid the market activity, the U. S. presidential election approached with a late shake up atop the Democratic ticket, changing the contours of the race. National polls showed a tight contest with no clear front runner ahead of Election Day.
Citizens can understandably have strong feelings about the outcomes of political races. But when thinking about investments, they may take heart that history shows that the president is only one of many inputs into the market. Stocks have generally trended higher, regardless of who is in office.
At a time when passions may be running high for many, it’s a reminder that taking the long view can be a source of reassurance.
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