Monthly Market Review — September 2024

Equities

Global equities rose (+2.0%) in September, concluding the month with a 19.1% gain year to date. Stocks fell sharply at the beginning of the month after declines in some mega-cap technology stocks and signs of a cooling US economy rippled across the globe and stoked concerns about the state of the global economy. However, stocks rebounded following a sizable 50 basis points (bps) interest-rate cut by the US Federal Reserve (Fed) and a more forceful Chinese stimulus that bolstered market sentiment. Lower energy prices helped to ease inflationary pressures, and resilient labor markets in the US, Europe, and Japan reinforced the view that the global economy could achieve a soft landing. However, some key economic indicators were mixed across many developed nations as services purchasing managers’ indices (PMIs) remained in expansionary territory, while manufacturing PMIs exhibited sustained weakness. In China, markets were encouraged by more substantial policy support from the People’s Bank of China (PBOC), which aimed to revitalize the country’s economic recovery. Politics garnered greater attention amid a close US presidential race and leadership changes in other countries; Shigeru Ishiba was elected as Japan’s prime minister, Michael Barnier became France’s prime minister, and Claudia Sheinbaum was sworn in as Mexico’s first female president. Geopolitical risks intensified, with escalating conflict in the Middle East threatening to ignite a broader regional war after Israeli forces killed Hezbollah leader Hassan Nasrallah in Beirut.

US

US equities (+2.1%) ended higher in a volatile month. Stocks tumbled in the first week of September, led lower by technology stocks, after continued signs of a softening labor market and weak manufacturing activity in August spurred anxiety about the slowing US economy and tight monetary policy. However, equities quickly rebounded amid beliefs of oversold conditions, a 50 bps interest-rate cut by the Fed, and some encouraging economic indicators that supported views that the economy remains healthy. The Fed kicked off its long-anticipated monetary-easing cycle with an oversized rate cut, signaling its intent to support the labor market in an effort to engineer a soft landing for the economy. The Fed’s Summary of Economic Projections showed that policymakers’ median forecast is for an additional 50 bps of cuts this year followed by 100 bps of cuts in 2025, but there was a wide dispersion in projections about where interest rates will settle in the longer term. Inflation continued to moderate, with the core Personal Consumption Expenditures Price Index rising at a slower-than-expected pace of 0.1% in August (2.7% annually). With five weeks until the US presidential election, polling showed that the race between Vice President Kamala Harris and former President Donald Trump is extremely close.

Economic data released during the month was mixed, highlighted by more signs of a gradually cooling labor market. In August, nonfarm payrolls grew by 114,000, well below expectations of 185,000, and job growth in the prior two months was revised lower. The unemployment rate dipped slightly to 4.2%. Job openings in July dropped to their lowest level since May 2021, although subdued initial jobless claims in August signaled a relatively low level of layoffs. Consumer spending moderated in August but remained resilient amid still-strong wage gains; headline retail sales rose only 0.1% after surging 1.1% in July, while personal spending on goods and services advanced 0.2%, following a 0.5% gain in July. The Conference Board’s Consumer Confidence Index slid to 98.7 in September, down from 105.6 in August and near the bottom of the narrow range that has prevailed over the last three years. The decline was the largest in three years and reflected anxiety about the job market and the broader economy. Despite the recent decline in mortgage rates, the housing market was still constrained by a lack of affordability and limited inventory. New- and existing-home sales declined in August, but single-family homebuilding rebounded, and homebuilder sentiment improved for the first time in six months amid expectations of lower interest rates.

In September, the manufacturing sector remained in contractionary territory as the Institute of Supply Management (ISM) Manufacturing Index registered 47.2, matching August’s reading. Demand remained muted and employment fell at a faster pace, although production advanced toward an expansionary level, and new orders improved. The services sector expanded at a modest pace for the second straight month, with the ISM Services Index rising slightly to 51.5. The National Federation of Independent Businesses Small Business Optimism Index fell in August amid political uncertainty and expectations of lackluster sales.

Within the S&P 500 Index (+2.1%), eight of the 11 sectors posted positive results for the month. Consumer discretionary (+7.1%) was the best-performing sector, led by automobiles (+17.9%). Utilities (+6.6%) and communication services (+4.6%) also outperformed. Energy (-2.7%) was the worst-performing sector. Health care (-1.7%) and financials (-0.6%) also underperformed.

Europe

European equities (-0.7%) decreased in September as slowing economic growth in the eurozone heightened concerns about a potential recession. The region’s business activity contracted sharply and unexpectedly in September as the HCOB Flash Eurozone Composite PMI dropped below 50.0 for the first time in seven months, falling to 48.9, from 51.0 in August. The manufacturing downturn accelerated, particularly in Germany, while services activity grew at the slowest pace since February after the Olympics-related boost to business faded. Eurozone employment was modestly lower, yet the drop in staffing levels was the largest since December 2020. Eurozone headline inflation slid to 1.8% in September, from 2.2% in August, below the European Central Bank’s (ECB’s) target for the first time in three years. Core inflation ebbed marginally to 2.7%. Against a weaker economic backdrop and subsiding inflation, the ECB lowered interest rates by 25 bps, to 3.5%, signaling that borrowing costs will likely remain on a “declining path” in the months ahead. The central banks of Switzerland and Sweden also cut interest rates, while the Bank of England left policy unchanged. Second-quarter earnings for companies in the STOXX 600 Index are forecast to increase by 3.0% from a year earlier, according to LSEG.

The contraction in Europe’s manufacturing sector deepened in September; the HCOB Eurozone Manufacturing PMI dipped to 45.0 as production, new orders, employment, and procurement activity declined at quicker rates, and business confidence slipped to a 10-month low. Input costs decreased for the first time in four months, and output prices fell. The HCOB Flash Eurozone Composite PMI revealed that services sector activity slowed faster than expected to a level indicative of a modest expansion, with new business decreasing for the first time in seven months. The European Commission’s Economic Sentiment Indicator edged lower to 96.2 in September; industry confidence worsened, while consumer confidence improved.

Germany’s (+2.9%) leading economic institutes downgraded the country’s GDP growth forecast for 2024 to -0.1%, from 0.1% in their previous spring forecast, due to deep structural adjustments to decarbonization, digitization, demographics, and stronger international competition. The ZEW Indicator of Economic Sentiment plummeted to a 12-month low, and the assessment of the current economic situation decreased to its lowest level since May 2020. The UK’s (-1.8%) economy unexpectedly stagnated in July as modest growth in services was offset by weakness in construction and manufacturing. In September, the S&P Global Flash UK PMI Composite Output Index showed that business activity in manufacturing and services continued to expand, but at a slower pace. In France (+0.5%), President Emmanuel Macron named the EU’s former Brexit negotiator Michel Barnier as the new prime minister in an effort to forge a stable government that could survive a hung parliament.

Pacific Basin

Pacific Basin equities (+0.3%) ended the month slightly higher. In Australia (+2.9%), the Reserve Bank of Australia (RBA) kept interest rates at a 12-year high of 4.35% for a seventh straight meeting and signaled that rate cuts are unlikely in the short term due to stubborn inflation and a healthy job market. Annual headline inflation cooled in August to 2.7%, from 3.5% — its lowest level since August 2021 — driven by temporary cost-of-living subsidies, particularly for energy. The trimmed mean core measure preferred by the RBA also fell to a multiyear low of 3.4%, down from 3.8%, but was still above the bank’s 3% upper target band. Money markets priced in a high probability that the RBA will lower interest rates by December. Despite the surprisingly resilient labor market, the economy remained subdued as business confidence sank in August and consumer spending and sentiment remained depressed amid elevated borrowing costs and sticky inflation. Second-quarter GDP advanced at a paltry 0.2% pace compared to the first quarter and 1.0% from a year earlier — the weakest annual growth since the 1990s recession, excluding the pandemic.

In Japan (-2.2%), former defense minister Shigeru Ishiba became the leader of the nation’s ruling party and the country’s new prime minister. Ishiba stated that “monetary policy must remain accommodative as a trend” to support a fragile economic recovery, emphasizing that the country should prioritize an end to deflation and warning of weak consumption. However, he also said he would not push back on further increases in interest rates. Additionally, Ishiba indicated the need for a fiscal package to cushion the impact of rising living costs. Japanese inflation accelerated in August for a fourth consecutive month, as the core CPI rose 2.8% from a year earlier, slightly above the 2.7% level in July. As expected, the Bank of Japan (BOJ) kept interest rates unchanged. BOJ Governor Kazuo Ueda indicated that the central bank isn’t in a rush to raise rates, highlighting that the lower upside risks to inflation from the recent rise in the yen afford the BOJ more time to monitor the progression of global financial markets and economies. After companies agreed to hefty hikes in the spring, real wages in August unexpectedly rose for a second consecutive month, keeping the BOJ on a path toward tighter monetary policy.

Hong Kong’s (+16.6%) central bank reduced interest rates for the first time in four years, mirroring the Fed’s policy and sending the Hang Seng Index higher. The 50 bps cut was widely anticipated and maintains the currency peg to the US dollar. Hong Kong stocks soared at the end of the month after China’s central bank unveiled its largest stimulus since the pandemic. In New Zealand (-2.7%), the central bank expects the economy to contract again in the third quarter, which would put the country in recession.

Emerging Markets

Emerging markets (EM) equities (+5.6%) generated robust returns in September. Asia led the gains, followed by Europe, the Middle East, and Africa (EMEA), while Latin America declined.

In Asia (+7.0%), China (+23.3%) skyrocketed after the central bank unveiled a broad package of monetary stimulus in response to the government’s mounting concern about slowing economic growth and investor pessimism. Notably, interest rates were sizably cut and the amount of cash that banks must hold in reserves was lowered by 50 bps. Additionally, new measures were unveiled to bolster the beleaguered property sector and support the capital market, including a program that allows funds, insurers, and brokers easier access to funding to buy stocks. These measures were announced amid a spate of disappointing economic measures that pointed to mounting pressure on the economy. In Taiwan (+0.5%), exports in the first eight months of this year expanded 10.9% year over year, primarily due to greater demand for electronics used in cloud-based data centers and AI applications. This led to a rosier 2024 GDP forecast of 3.8%. India’s (+2.1%) GDP is projected to expand 7.2% in fiscal year 2025. Thanks to a strong economy and a stable currency, interest rates are forecast to decline modestly, by 50 bps, over the next six months.

In EMEA (+1.6%), Saudi Arabia (+0.9%) will begin to unwind production cuts in an effort to regain its position as the world’s leading oil producer, even as lackluster demand pushed oil prices to their lowest level in almost three years. In South Africa (+3.6%), interest rates were cut for the first time in more than four years amid a faster-than-expected decline in inflation and a modest improvement in second-quarter GDP. In the United Arab Emirates (+2.1%), the central bank slashed interest rates by 50 bps and lifted its 2024 GDP growth forecast to 4%, from 3.9%.

In Latin America (-2.2%), Brazil’s (-4.1%) second-quarter GDP grew at a faster-than-anticipated 1.4% pace compared to the first quarter. The central bank raised interest rates for the first time in two years, by 25 bps, and signaled the possibility of additional hikes due to fears about the upside risk of inflation. Mexico’s (+1.0%) relationship with the US and Canada was strained by a controversial bill passed by Mexico’s Senate that will require judges to be elected, potentially threatening judicial independence and undermining checks and balances. The central bank lowered its benchmark interest rate by 25 bps for the second straight month. Peru’s (+8.0%) interest rates were also reduced by 25 bps, to 5.25%, as inflation continued to wane. The central bank forecast the economy to grow 3.1% in 2024 amid strong performance in every sector except agriculture.

Fixed Income

Most fixed income sectors produced positive total returns and outperformed duration-equivalent government bonds.

In the US, mixed economic data pointed to moderating headline inflation and a fragile labor market amid weakening nonfarm payrolls and elevated continuing claims. According to the Conference Board Index, consumer confidence sank to a three-month low driven by a negative assessment of business conditions and the labor market. Retail sales posted modest gains, durable goods orders were flat, and industrial production ticked up amid a recovery in motor vehicles and parts. Eurozone manufacturing activity slid deeper into contraction. Germany’s industrial production declined on a slowdown in the automotive sector, and the IFO business climate index fell for a fourth straight month. In the UK, the S&P Global Manufacturing PMI dipped below estimates but stayed in expansionary territory. In China, industrial profits fell, and inflationary pressures eased amid declining transportation and home goods costs. Canada’s unemployment rate ticked higher, while annual inflation decreased. In Australia, concerns over the economic outlook and job market dampened consumer sentiment.

Major central banks’ policy normalization continued. The Fed delivered a larger-than-anticipated 50 bps interest-rate cut and the ECB lowered rates for the second time this year as inflation continued to slow and the eurozone economy struggled to gain momentum. Sweden’s Riksbank enacted another 25 bps reduction in policy rates as inflationary pressure declined. China introduced a bold easing package to combat persistent deflation and lift market sentiment.

Most global sovereign yields moved lower as the yield curve steepened across developed markets. Short-dated yields declined as the Fed joined other central banks in cutting policy rates. The Bloomberg TIPS index rose 1.50% on a total return basis, and the 10-year breakeven inflation rate increased by 4 bps, to 2.19%, during the month.

Global credit outperformed duration-equivalent government bonds as spreads tightened. Within the securitized sectors, commercial mortgage-backed and asset-backed securities outperformed, while agency mortgage-backed securities underperformed duration-equivalent government bonds, respectively. Within EM, local markets debt (+3.39%) outperformed external debt (+1.85%), in US-dollar terms. Spread narrowing contributed favorably to external debt performance, and a decrease in US Treasury yields had a positive impact. Appreciation in EM currencies drove positive performance within local markets, and EM rates also had a positive impact.

Currencies

The US dollar weakened against most major developed markets and EM currencies, driven by the Fed’s larger-than-expected rate cut. Among the G10, the Australian dollar and the British pound outperformed. The RBA’s hawkish stance on the trajectory of interest rates supported the Australian dollar, while the British pound outperformed due to projections for a slower path to lower interest rates and a positive near-term economic growth outlook. The Japanese yen rallied as the BOJ signaled its readiness for additional rate hikes. Within EM, performance was broadly positive. The South African rand extended its gains from August, and the Brazilian real and Chilean peso were lifted by an outsized Fed rate cut and China’s stimulus package that spurred a greater risk appetite.

Commodities

Commodities (-0.1%) were flat in September. Energy detracted from performance, while industrial metals, precious metals, and agriculture & livestock gained.

Energy (-4.7%) fell in the period. Gasoline (-6.0%), crude oil (-5.8%), heating oil (-5.7%), and gas oil (-5.2%) remained under pressure due to possible production increases by OPEC+ members in December and weak oil demand in China. Natural gas (+21.4%) surged as Tropical Storm Helene made landfall in the Gulf of Mexico. Liquified natural gas demand was also expected to rise as the power sector continued to utilize more natural gas, which served as a more environmentally friendly alternative to coal-fired plants.

Industrial metals (+6.2%) rallied on the back of the Fed’s interest-rate cut, China’s newly announced stimulus package, supply disruptions, and increasing demand due to expansion of the electric vehicles sector, with aluminum (+7.1%), zinc (+6.9%), copper (+6.3%), nickel (+4.4%), and lead (+1.6%) rising during the period.

Precious metals (+5.9%) ended higher. Silver (+8.4%) and gold (+5.7%) prices rose after the Fed announced its first interest-rate cut since the pandemic, with lower interest rates reducing the cost of holding the non-yielding assets and strengthening demand for the commodities. Additionally, gold and silver prices were buoyed by strong demand in India as well as the Indian government’s decision to lower tariffs for the metals.

Agriculture & livestock (+5.6%) rose. Sugar prices (+14.4%) surged as high temperatures and dry conditions in Brazil’s Center-South growing region caused fire outbreaks and raised concerns about production disruptions. Coffee prices (+11.2%) also rallied as the National Coffee Association reported that demand was at a two-decade high. In addition, Colombia — the world’s third-largest coffee producer — saw a reduction in coffee output due to extreme weather in the region. Corn (+6.4%) and soybean (+6.1%) prices ended higher amid hotter and dryer weather in the growing regions. China’s announced stimulus package also supported the outlook for the soybean market. Wheat prices (+5.6%) increased amid concerns about the production outlook due to persistent drought conditions in the US and production cuts by Ukraine, Russia, and the European Union. Lean hogs (-1.2%) ended lower as the Quarterly Hogs & Pigs report showed a year-over-year increase in inventories during the month.