Highlights:
The Federal Reserve's 50 basis point rate cut helped the market reach new highs, with the S&P 500 ending the month up 2.1% and the Bloomberg U.S. Aggregate Bond Index up 1.3%.
Early quarter rotation to cyclical and smaller stocks shifted back to big tech and AI by the end of September.
Stock markets showed optimism with strong earnings forecasts, while the bond market signaled economic weakness, with yields in the intermediate portion of the curve falling precipitously.
The stock market opened the month of September with a sharp reality check, falling for four consecutive days before quickly reversing course to reach new all-time highs. The largest catalyst was the Federal Reserve's 50 basis point cut on September 18. The S&P 500 Index was up 2.1% for the month, taking the third quarter return to 5.9% and the year-to-date to a buoyant 22.1%. Meanwhile, bond investors also fared well, with the Bloomberg U.S. Aggregate Bond Index up 1.3% in September as two-year Treasury yields fell below the 10-year Treasury yield for the first time since July 2022.
The most interesting storyline developing over the past months has been the contrary messaging from the stock and bond markets. The stock market returned in September to the familiar leadership of big tech and AI after initially rotating to long-overlooked areas of the market, primarily cyclical and smaller stocks, earlier in the quarter. For the full quarter, the leading sectors remained Utilities, Real Estate, Industrials, Financials, Materials, and Staples. Regardless of leadership, the underlying mood was exuberance, fueled by robust earnings projections and expectations of regular Fed cuts to come.
Meanwhile, a weakening jobs market and the possibility that the Fed's actions were too little, too late set the bond market on a path that signaled economic weakness may be ahead. International central bank actions also could be read as indicators of potential global economic trouble, particularly with the Chinese central government's extensive stimulus package unveiled late in the month. The question is whether these actions will reinvigorate the Chinese consumer or reverse the country's troubled real estate market.
Add into this stock versus bond conundrum the troubled Mideast, the land war in Ukraine, and global financial stresses (including the reemergence of Japan carry trade woes), and it may seem like a precarious time for investors. On the other hand, U.S. investors still have more than $6 trillion in money market funds whose yield will drift south in tandem with Fed rate cuts, some of which will inevitably find its way into stocks and bonds. In other words, there are always uncertainties and always reasons for optimism. Asset allocation is the primary tool to balance these risks and rewards. Regarding stock selection, our holdings reflect our underlying confidence in the long-term prospects of the U.S. economy and the ability of quality companies to participate and capitalize on that trend. But even the stocks of the most solid of enterprises can be buffeted by the inevitable volatility of the market. As we transition into a lower-rate environment, we counsel investors who seek long-term rewards to be patient and prepared for a potentially bumpy path forward.