We hope that everyone had a great summer and that you are enjoying the “summer-like” weather we have experienced this fall in New England.
Both the stock and bond markets enjoyed the summer as well, as most asset classes saw positive returns over the past three months as trade tensions dwindled, artificial intelligence euphoria continued and expectations for near-term rate cuts fueled markets. Domestic small cap stocks led the way this quarter with a return of +12.4%, followed by domestic large cap stocks (+8.1%), international stocks (+4.8%), and bonds (+2.0%). When you look at the year-to-date returns, international stocks continue to lead the way with a return more than +10% higher than their domestic counterparts (+25.7% vs 14.8%).1
As mentioned above the main catalysts for the continued move upwards of equity prices during the quarter were trade deals or continued extensions with our main trading partners in Europe, Japan and China. Artificial intelligence (AI) also continues to play its part. In a recent Census survey of 1.2 million businesses, only 3.8% currently use AI and those companies expect that number to more than double in the next 6 months as the technology continues to be implemented. 2 Lastly, the Federal Reserve also contributed to the market’s success with an interest rate cut of 25bps at its September meeting and it expects that more cuts will be on the way. Federal fund futures project another 100bps of interest rate cuts coming over the next 12 months.3
On the economic front, we saw some mixed data as headline CPI inflation rose to +2.9% from +2.8% where it started the quarter and the unemployment rate increased to 4.3% from 4.1% with only +22,000 jobs added during the month of August. 4 While both statistics only increased slightly, there is some concern that the economy is starting to show some weakness, which is something we will be continuing to watch during the balance of the year. Unfortunately, this data could be challenging to monitor in the coming days and weeks with the Federal Government entering a partial shutdown for the first time since 2018. During the partial shutdown many agencies are closed including the Bureau of Labor and Statistics which is responsible for both of those figures.
As we enter the last quarter of the year, we remain cautiously optimistic that the market will finish off the year on a positive note despite some of the uncertainties that are starting to present themselves. Also, we remain confident in our diversified approach to asset allocation, which was helped early in the year by our international stocks and has benefited more recently by our allocation to domestic mid and small cap stocks.
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE) Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index) Growth Stocks (Russell 1000 Growth) Value Stocks (Russell 1000 Value)
2 https://www.census.gov/newsroom/press-releases/2024/business-trends-outlook-survey-artificial-intelligence-supplement.html
3 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html
4 https://www.bls.gov/news.release/pdf/empsit.pdf
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