October 2024 Market Outlook

The Federal Reserve’s decision to cut the Fed Funds rate by 50bps last month was one of the most significant financial developments in the third quarter, if not the entire year. This shift toward a more dovish monetary policy stance contributed to stabilizing financial markets, particularly equities, and led to a renewed focus on risky assets, like U.S. stocks. However, the quarter was marked by periods of increased volatility and continued geopolitical tensions, which dampened some market enthusiasm. Despite these obstacles, all major U.S. equity indices posted positive gains, with the S&P 500 making 18 new highs, continuing a streak of four consecutive positive quarters.

Portfolio Highlights 

With the Federal Reserve signaling the start to a protracted easing cycle, we still like owning equities. However, as the momentum of mega-cap tech stocks begins to wane, we are increasing our allocation to broader small-cap indices composed of companies with strong financials, stable earnings, and robust earnings growth. International equities are beginning to look more attractive as well, especially as the S&P 500 is trading at a Price / Earnings multiple of around 23x vs. a long-term average in the high teens. Despite last month’s rate cut, we continue to like short-term and medium-term bonds. Adding duration further out the curve will be dependent on post-election fiscal policy and the deficit levels.

Risk Management Around the Election 

Maintaining diversification across asset classes and focusing on long-term goals can help mitigate election-driven volatility. It's crucial to avoid indiscriminate selling of assets because timing the market re-entry correctly is extremely difficult, causing investors to miss out on potential post-election "relief rallies" once uncertainty clears.

Market Review 

After facing volatility in early August, driven by the unwind of the Japanese Yen carry trade, U.S. equities rebounded significantly off their lows, helped by the Federal Reserve’s 50 basis point rate cut in September. The S&P 500 rose 5.9% and the Dow Jones Industrial Average increased by 8.2%, but the NASDAQ underperformed with only a 2.6% gain. Small- and mid-cap stocks outperformed their large-cap counterparts, benefiting from the sector rotation that favored value stocks.

In the bond market, 10-year U.S. Treasury yields dropped to around 3.78%, a significant decline from their second quarter highs. Following the Fed's rate cut, the 2-year/10-year yield curve, which had been inverted for over two years, finally began to normalize as bond investors priced in further rate cuts.

Volatility Corner

In Q3 2024, the VIX fear index saw its third-largest spike, driven by Japan’s Yen revaluation, a Nikkei crash, and a crypto fund’s liquidity crisis. The S&P 500 put options surged, pushing the VIX from 15 to 65, before it fell back below 15 within 18 trading days—an unprecedented recovery.

Despite the S&P 500 hitting new highs in mid-September, VIX futures remain elevated, reflecting concerns about the upcoming November elections. The October VIX contract, expiring on the 16th, incorporates election uncertainty, showing investor caution despite strong equity markets.

The Fed 

On September 20th, the Federal Reserve Open Market Committee (FOMC) cut interest rates by 50 basis points, reducing the Federal Funds Rate target to 4.75%-5.00%. This marked the Federal Reserve’s first rate cut since beginning its aggressive tightening cycle in 2022. In the minutes of the September meeting, the Fed signaled that further rate cuts are likely in 2025, as inflation continues to trend downward, though future cuts remain data dependent. Markets had largely anticipated the cut, with rate futures reflecting over an 80% probability of a September cut and pricing in further easing through 2025.

Given that each investor's risk tolerance and objectives are unique, we encourage you to consult with your financial advisor to assess how this information might affect your overall investment strategy.

For more information, please email us at contact@ballastrockpw.com should you have an questions.