Market Commentary: October 2024
Another quarter down and another good one for market returns. If we look back at this quarter, we had quite the scare that got a lot of people out of the market. Can we all remember the Yen carry trade unwind that started at the beginning of the quarter? I know that it had a lot of people concerned and they got out of the market, especially with the VIX spiking to one of the highest levels ever recorded. By the way, historically speaking, anytime you get the VIX spiking above 30 – 40, you are usually better off buying instead of selling. Back to this quarter, we had the Yen carry trade to start, then a growth scare in the middle. Those were about the only down moves in the quarter, the other developments were much more positive.
The biggest development for the markets was the 50-basis point rate cut by the Federal Reserve. This, along with better economic data releases, alleviated the momentary growth scare. We even got revised GDP numbers for 2022 that took away the 2 consecutive negative quarters of GDP growth that many people pointed out as a recession. Speaking on GDP growth, we are currently growing at about 3% while inflation is stable and falling. This is giving the Fed confidence in cutting rates in a growing economy. We have also had China begin stimulating its economy to end the quarter. This has ignited the Chinese stock market and many commodity markets.
It can’t all be rosy. The two areas that have investor’s focus are U.S. election and Middle East unrest. I will tackle the election first. To me this is more about where money will be spent into the economy versus will it be spent, and if that’s the case, it should be a net positive for markets. Your investment mix will have differing returns probably, but overall, both parties are for stimulating the economy. For example, the Republican ticket is running on increasing domestic oil production and deregulation, while the Democratic ticket is for first-time home buyer assistance and student debt forgiveness. All of those are stimulative. The Middle East is something to watch because of the escalation that has occurred. Anytime this region of the world is in conflict, it is important to watch oil prices. That is the thing that has impacted the world economy the most from these conflicts in the past. This time is a little different with the U.S. being a major producer and OPEC+ having apparent additional capacity that could be brought on if prices rise.
Last quarter’s developments for markets and the economy have been positive. Not only that, they appear to be paving the way for further growth in the future. Austan Goolsbee of the Federal Reserve Bank of Chicago said this on Oct. 3rd, “25 bps vs 50 bps cut is not as important as getting rates down over the next 12 months by a lot, to get to neutral.” As this statement clearly lays out, they want to get their policy rate down to neutral quickly, and they believe neutral to probably be in the 3% – 3.5% range. This will continue to ease financial conditions. The hope is that it will begin to make it easier for businesses that need financing to be able to get it, and over time, unlock the housing market that has become stagnant. Add into this easing the stimulus that China is doing, and you have the potential for a sustainable economic expansion. We typically enter into one of these phases after a pretty anemic period of economic growth, but this time we appear to have skipped the anemic phase. I am optimistic about the future, and that is without even touching on what the potential of generative AI may bring from a productivity boost.
Sincerely,
Wes Johnson, CIMA®
Chief Investment Officer
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