October 7, 2024

The S&P 500 Index reached new highs in September and gained 2.1% for the month.  Discretionary (+7.1%) and utilities (+6.6%) were the best performing S&P sectors, while energy (-2.7%) and health care (-1.7%) were the worst performing sectors.  From a factor view, lower quality and weaker balance sheets performed best, while growth was slightly better than value.  Large-cap and mid-cap stocks outperformed small-cap stocks for a second consecutive month.

Macroeconomic data turned more positive recently, led by a slight improvement in consumer sentiment and stronger than expected August retail sales. Buoyed by cooling inflation, the Federal Reserve lowered interest rates for the first time in four years, as Fed Chairman Powell spoke of a “recalibration” of policy to reflect the shift in the balance of risks to the employment side of their dual mandate.  The aggressive 50 basis point rate reduction, at a time when the labor market remains solid, the consumer is still spending, and the economy continues to expand at a healthy rate, suggests the odds of a soft economic landing have increased even further.

Regarding the inflation side of the Fed’s mandate, recent labor issues at Boeing (the company has offered union workers a 30% pay rise over four years) do not portend that all is well on the labor inflation front.  It goes without saying that market participants will be paying careful attention to this matter and its resolution in the days ahead.

We expect that profit growth convergence between the “Magnificent 7” and the rest of the market, along with the interest rate cuts, should support broader market participation going forward as well as a “catch-up” trade from small caps and early cycle names.  In the very near term, however, we remain braced for additional market volatility heading into a contentious Presidential election with uncertain outcomes for policy and taxes.  The combination of elevated uncertainty along with elevated valuations and sentiment present the possibility of market turbulence ahead. We continue to believe a diversified portfolio of reasonably valued, high-quality durable growth stocks allows ongoing participation in the current bull market while offering superior downside protection amidst any bouts of market volatility that may arise.