Quarterly Market Review

Global equities (+5.0%) rose in the third quarter, ending the period with a 19.1% gain year to date. Heightened market volatility coincided with notable central bank policy decisions, major political developments, and an escalating conflict in the Middle East. At the beginning of August, markets fell precipitously following an abrupt unwinding of the Japanese yen carry trade before share prices jolted higher as indications of accelerated monetary policy easing emerged. Several central banks, including those of Canada, England, and New Zealand, lowered interest rates in July and August. Markets reached new all-time highs in September following a jumbo 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 global markets; services purchasing managers’ indices (PMIs) remained in expansionary territory, while manufacturing PMIs continued to show sustained weakness. Political developments garnered greater prominence amid an extremely close US presidential race and leadership changes in many countries; Sir Keir Starmer became the UK’s prime minister, Michael Barnier assumed the role of prime minister in France, Shigeru Ishiba was appointed as Japan’s new 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.

Global fixed income markets generated strong positive total returns during the third quarter, as measured by the Bloomberg Global Aggregate Index hedged to US dollars. Sovereign yields declined sharply as inflation further moderated across most developed market (DM) economies and as central bank policies generally trended toward more accommodation. Spread sectors outperformed government bonds as spreads compressed. Most currencies gained versus the US dollar.

Commodities (-5.3%) ended the quarter lower. Energy was the primary detractor, while precious metals, agriculture & livestock, and industrial metals registered positive returns.

Equities

United States

US equities (+5.9%) rose for the fourth consecutive quarter to register a 22.1% year-to-date gain. The rally in stocks considerably broadened beyond a concentrated group of mega-cap technology companies that powered the market in the first half of the year, as the equal-weighted S&P 500 Index significantly outperformed the market-cap weighted version of the index and value stocks surmounted their growth counterparts by a wide margin. Economic indicators suggested that the US economy remained healthy after second-quarter GDP rose at a 3.0% annualized rate. However, concerns about slowing economic activity and the cooling labor market prompted the Fed to begin easing monetary policy with an oversized interest-rate cut of 50 bps in September in an effort to generate a soft landing for the economy. The decision was supported by a steady decline in inflation, with the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures Price Index — rising at a slower-than-expected pace of 0.1% in August (2.7% annually). The Fed’s Summary of Economic Projections showed that policymakers’ median forecast is for an additional 50 bps of interest-rate cuts this year followed by 100 bps of cuts in 2025. Corporate earnings were stronger than expected; according to FactSet, second-quarter earnings for companies in the S&P 500 Index grew 11.2% year over year, surpassing the 8.9% estimate on June 30 and well above the 10-year average of 8.4%. The extremely close presidential race between Vice President Kamala Harris and former President Donald Trump kept the markets on edge.

Economic data released during the quarter suggested a slowing but still-healthy economy. The labor market continued to cool, primarily through fewer job openings and reduced hiring rather than widespread layoffs. 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. 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. The unemployment rate rose slightly to 4.2% in August, from 4.1% in June. Consumer spending in August moderated but remained resilient amid still-strong wage gains; headline retail sales increased 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 100.4 in June and near the bottom of the narrow range that has prevailed over the last three years, reflecting greater anxiety about the job market and the broader economy. Despite the recent decline in mortgage rates, home sales were constrained by a lack of affordability and limited inventory. Encouragingly, single-family homebuilding rebounded in August, and homebuilder sentiment in September improved for the first time in six months amid expectations of lower interest rates. Manufacturing contracted at a modest pace during the quarter, while the services sector returned to an expansionary level after contracting in June.

Within the S&P 500 Index (+5.9%), 10 of the 11 sectors posted positive results for the quarter. Utilities (+19.4%) and real estate (+17.2%) were the best-performing sectors. Industrials (+11.6%) also outperformed, as aerospace & defense (+13.8%) and machinery (+13.0%) contributed to the sector. Energy (-2.3%) was the worst-performing sector. Information technology (+1.6%) and communication services (+1.7%) also underperformed.

Europe

European equities (+1.6%) rose in the third quarter. Eurozone second-quarter GDP grew 0.2% compared to the first quarter, supported by higher real incomes and public spending; however, slowing economic growth in the third quarter 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. Services activity grew at the slowest pace since February after the Olympics-related boost to business faded, and the manufacturing downturn accelerated, particularly in Germany. Eurozone employment was modestly lower, yet the drop in staffing levels was the sharpest since December 2020. Encouragingly, eurozone headline inflation dropped to 1.8% in September, from 2.5% in June, below the European Central Bank’s (ECB’s) target for the first time in three years. Core inflation slowed marginally to 2.7%. Against a weaker economic backdrop and subsiding inflation, the ECB reduced interest rates by 25 bps in September, to 3.5%. The central banks of Switzerland, Sweden, and the UK also cut interest rates during the quarter. According to LSEG, second-quarter earnings for companies in the STOXX 600 Index are forecast to increase by 3.0% from a year earlier, better than initially expected. Geopolitical tensions remained heightened, with Ukraine’s surprising incursion into Russian territory marking a significant escalation in the war.

Europe’s manufacturing sector contracted over the quarter; the HCOB Eurozone Manufacturing PMI dipped to 45.0 in September, from 45.8 in June, as production, new orders, employment, and procurement activity declined at quicker rates. In September, input costs decreased for the first time in four months, and output prices fell. The HCOB Flash Eurozone Composite PMI revealed that services activity in September grew at the slowest pace since February but still registered a modest expansion. The European Commission’s Economic Sentiment Indicator edged up to 96.2 in September, from 95.9 in June; both industry confidence and consumer confidence improved.

Germany’s (+6.3%) leading economic institutes downgraded the country’s GDP growth forecast for 2024 to -0.1%, from 0.1% in their spring forecast, due to deep structural adjustments to decarbonization, digitization, demographics, and stronger international competition. In September, the manufacturing sector contracted at the fastest pace in a year, while the ZEW Indicator of Economic Sentiment plummeted to a 12-month low. In the UK (+1.7%), Sir Keir Starmer became prime minister after the Labour Party’s landslide victory in the general election ushered in a new period of political stability. The Bank of England (BOE) lowered interest rates for the first time since 2020, to 5%, after core inflation cooled, notably within the services sector. In September, the S&P Global Flash UK PMI Composite Output Index showed that business activity in manufacturing and services continued to expand. In France (+3.5%), President Emmanuel Macron named the European Union’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 (-0.8%) ended modestly lower. In Australia (+7.4%), interest rates remained at a 12-year high, with the Reserve Bank of Australia’s (RBA’s) Governor Michele Bullock indicating that market expectations for a rate cut by the end of the year don’t align with the bank’s forecasts due to stubborn inflation and a healthy job market. Wage growth in the second quarter advanced 4.1% from a year ago, matching the first quarter’s elevated pace and reflecting a still-tight labor market with persistent inflation pressures. The trimmed mean core inflation measure preferred by the RBA fell to a multiyear low of 3.4% in September but was still above the RBA’s 3% upper target band. Subdued economic conditions persisted during the second quarter 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 (-5.9%), the Bank of Japan (BOJ) took further steps to unwind its monetary stimulus in July by raising its benchmark interest rate to 0.25% and unveiling plans to gradually reduce its monthly bond purchases to approximately ¥3 trillion (US$19.9 billion) by the first quarter of 2026. In August, BOJ Deputy Governor Shinichi Uchida pledged to refrain from raising interest rates in unstable market environments after the BOJ’s rate hike on July 31 triggered historically high financial market volatility as investors unwound yen carry-trade positions. Following a 2.3% contraction in the first quarter, second-quarter annual GDP growth rebounded to 3.1%, well above the 2.3% consensus estimate, providing optimism that the long-awaited recovery in personal spending may be underway after the largest wage increases in more than three decades. In September, former Defense Minister Shigeru Ishiba became the leader of the nation’s ruling party and the country’s new prime minister. 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% in July. As expected, the BOJ kept interest rates unchanged in September. 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.

Hong Kong (+23.8%) soared at the end of the period after China’s central bank unveiled its largest stimulus since the pandemic. Hong Kong’s economy grew much faster than expected in the second quarter as GDP expanded 3.3% year over year versus the 2.7% estimate, driven by increasing trade and capital flows from mainland China. However, falling domestic demand was a concern. In September, the 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 Hong Kong’s currency peg to the US dollar.

In Singapore (+12.2%), GDP accelerated 2.9% year over year in the second quarter, above expectations of 2.7%, prompting economists to raise their 2024 GDP forecast to 2.6%, from 2.4%. The central bank left interest rates unchanged after decelerating inflation gave policymakers more scope to keep monetary policy settings stable to support the trade-reliant economy against slowing global economic growth and elevated geopolitical tensions. In August, annual core inflation ticked up to 2.7% after dropping to 2.5% in July, which was the lowest since February 2022. In New Zealand (+1.3%), the central bank reduced interest rates much sooner than anticipated amid a prolonged economic slump, with recession expected in the third quarter.

Emerging Markets

Emerging markets (EM) equities (+6.8%) ended the quarter higher, led by Asia and followed by Europe, the Middle East, and Africa (EMEA) and Latin America.

In Asia (+7.3%), China (+22.4%) soared 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 after second-quarter GDP was well below consensus and as a recent spate of disappointing economic indicators pointed to mounting pressure on the economy. India’s (+7.9%) GDP expanded at a slower-than-expected annual pace of 6.7% in the second quarter, but growth still outpaced other major economies. The Reserve Bank of India projected GDP to expand 7.2% in the fiscal year 2025. Thanks to a strong economy and a stable currency, interest rates are forecast to decline modestly over the next six months. Taiwan’s (-1.7%) second-quarter economic growth of 5.06% exceeded expectations. 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%.

In EMEA (+5.2%), intensifying conflict in the Middle East heightened the risk of a broader regional war. Saudi Arabia (+5.9%) 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 (+9.7%), 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. The UAE (+12.0%) registered robust gains, with the central bank slashing interest rates by 50 bps and raising its 2024 GDP growth forecast to 4%, from 3.9%.

In Latin America (+4.6%), Brazil’s (+5.8%) 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 (+3.6%) relations with the US and Canada were strained by a controversial bill that will require Mexico’s judges to be elected, potentially threatening judicial independence and undermining checks and balances. Declining inflation and tepid economic growth led the Bank of Mexico to lower interest rates by 25 bps in September for the second straight month.

Fixed Income

Global fixed income markets generated strong positive total returns during the third quarter, as measured by the Bloomberg Global Aggregate Index hedged to US dollars. Sovereign yields sharply declined as inflation further moderated across most DM economies and central bank policies generally trended toward more accommodation. Spread sectors outperformed government bonds as spreads compressed. Most currencies gained versus the US dollar.

Global economic data diverged during the quarter. The US economy expanded at a faster-than-expected pace in the second quarter, boosted by strong consumer spending and business investment. European economic growth lagged the US, as Germany remained the eurozone’s weakest link. The UK’s economic growth was revised marginally lower, though there were still positive signs from household finance and business investments. Canadian inflation eased back to the Bank of Canada’s 2% target for the first time in more than three years. Australia’s inflation also steadily declined, but at a slightly slower pace than forecast by the RBA and relative to most other developed countries. In contrast, Japan’s inflation accelerated for the fourth straight month. China’s manufacturing PMI slipped backed into contractionary territory.

DM sovereign yields ended broadly lower over the quarter, led by North America (US, Canada) and Germany. A softening US labor market and a murkier eurozone growth outlook (with weakness still primarily confined to Germany) allowed for more DM central banks to ease interest rates, although monetary policy decisions varied amid differing growth and inflation dynamics among countries. The Fed, the BOE, and the Reserve Bank of New Zealand lowered interest rates for the first time since the pandemic, while the ECB continued its easing cycle. The Swiss National Bank also reduced rates and signaled more cuts before year end. Meanwhile, the Norges Bank kept rates steady while retaining its hawkish guidance given the weakness in the krone. The BOJ surprised markets with a 25 bps rate increase and also outlined plans to scale back its massive bond buying program. The People’s Bank of China cut several major policy rates as economic indicators deteriorated and the property market slump continued.

Currencies

The US dollar ended lower against all other G10 currencies and most EM currencies over the quarter, predominately driven by pent-up anticipation that the Fed would join the global policy-easing cycle. Other idiosyncratic events also contributed to the US dollar’s decline, such as the BOJ’s rate hike, which led to a sharp reversal of the yen carry trade and caused the US dollar to lose ground to the Japanese yen and Swiss franc. The Canadian dollar posted a small gain but lagged its G10 peers, as lackluster economic growth and domestic inflation fueled calls for bigger rate cuts. Within EM, Asian currencies (Malaysian ringgit, Indonesian rupiah) led the gains amid increased capital flows. The South African rand appreciated meaningfully against the US dollar, reflecting gains in key economic sectors during the third quarter. However, the Turkish lira and Mexican peso were notable underperformers. Turkey’s inflation remained more than 10 times higher than the central bank’s target, while the Mexican peso was weighed down by a judicial-reform controversy and recent data that signaled an economic slowdown.

Commodities

Energy (-12.2%) fell during the period. Heating oil (-15.7%), gas oil (-14.9%), gasoline (-12.9%), and crude oil (-12.0%) prices remained under pressure due to a potential production increase by OPEC+ members in December and weak oil demand in China. Natural gas (-6.5%) significantly declined, even as Tropical Storm Helene hit the Gulf of Mexico and exacerbated shipping disruptions. Rising output and above-average storage also weighed on natural gas prices.

Industrial metals (+2.4%) ended higher. The Fed’s interest-rate cut, China’s newly announced stimulus package, and rising demand due to the expansion of the electric vehicles sector supported zinc (+5.0%), aluminum (+3.8%), copper (+2.2%), and nickel (+1.0%) prices. However, lead (-6.9%) fell sharply, with a Shanghai Metals Market survey showing ample inventory.

Precious metals (+12.3%) rallied. Gold (+12.9%) and silver (+6.3%) 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 the demand for the commodities. Additionally, gold and silver were buoyed by strong demand in India as well as the Indian government’s decision to lower tariffs for the metals.

Agriculture & livestock (+3.3%) advanced. Cocoa prices (+25.4%) remained elevated as severe weather and spreading disease among cocoa trees continued to impair cocoa production in the growing regions of Côte d’Ivoire and Ghana. Coffee prices (+22.8%) rallied, with the National Coffee Association reporting that demand is 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. Lean hogs (+14.2%) surged as lower feeding costs helped drive up processor demand, and wholesale pork prices remained firm in the market. Soybeans (-3.0%) and wheat (-1.4%) prices slid due to a better-than-expected production outlook by the United States Department of Agriculture and increasing uncertainty about the global economic outlook. Feeder cattle (-2.4%) prices were lower amid higher feeding costs due to rising corn prices.