The Best Three Quarters in 27 Years

By Clear Perspective Advisors on October 10, 2024

Stocks Don’t Care

The 2024 U.S. presidential election. Assassination attempts on a former President. Tension and war across the globe. Global central bank easing. The Yen carry trade unwinds. Port strikes and natural disasters affecting the country. News and developments have not lacked in significance this year, and almost nothing has been able to slow down the U.S. stock market. The S&P 500 just had its best year through three quarters since 1997, gaining 20.8%.

Chart 1: The S&P 500 Cannot Be Slowed in 2024^[1]

U.S. economic resiliency has been a big part of this. This year inflation has fallen from 3.35% to 2.53%, GDP is growing above 2%, and the labor market is near 10-year averages for unemployment, jobless claims, and monthly job gains. On top of this, the Federal Reserve is embarking on a new easing cycle to further support the U.S. economy. Lower interest rates will help bring down mortgage rates, and auto loans, and provide cheaper borrowing costs for consumers and corporations. Together, the U.S. market is in a solid position for further expansion. We think GDP will grow at or above trend in 2024 with earnings growth of 8-10%.

What Worked and What Did Not in the Third Quarter?

From a high level, the S&P 500 gained 5.9%, Nasdaq 2.8%, and Russell 2000 9.3% in the third quarter. Utilities were the best performing sector, up 19.3%. Real Estate, Industrials, and Financials all gained over 10%, and Technology was the second worst-performer, up a mere 1.6%. Energy lagged the most at -2.3%.

After an over 14-month Fed pause, the September Federal Open Market Committee (FOMC) meeting brought a deduction in the Fed Funds Rate of 50 basis points (bps). Yields fell across the curve in 3Q with the two-year Treasury yield tightening 106 bps and the ten-year Treasury yield 58 bps. U.S. Treasuries returned 4.7% and High Yield 5.7%, with Global Fixed Income bonds returning 7.5% in the quarter.^[2] The highly watched 2s10s curve un-inverted for the first time in two years ahead of the Fed decision in early September. Treasury yields have anticipated the rate-cutting cycle most of this year by proactively tightening ahead of the Fed.

Value outperformed Growth by over 700 bps. Investors learned that the market could appreciate without the help of the Magnificent 7 and Technology. Although a 31% weighting in the S&P 500, Technology only contributed 9.5% (56 bps) to the index’s total return in the quarter. Since the beginning of July, the Mag 7 has only accounted for 2.9% of the S&P 500’s total gain. The four stocks with the largest negative contribution to the S&P 500 in the quarter were Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), and Nvidia (NVDA); all four names had negative returns and held a combined 20% weighting of the index. The broadening and rotation we have discussed over the last few months was realized in the third quarter, which was ultimately a benefit to our portfolios.

Chart 2: Value Beat Growth and the S&P 500 in the Third Quarter^[3]

What Changed?

The rotation was much awaited after technology accounted for 95% of the S&P 500’s return in the second quarter. Markets sold off heavily from mid-July to early August following June’s cooler-than-expected inflation report; the S&P 500 went from +3% quarter-to-date (QTD) to -5.2% in just a few weeks. The Tech sector bottomed at -13% in the quarter near early August but made up all the losses by quarter-end and closed flat.

The Yen carry trade unwind scared markets for a couple of days and also exacerbated the sell-off in early August, but markets quickly caught a bid throughout the second half of the month. Seasonality was felt in the first week of September when stocks fell 4%. August’s weaker-than-expected jobs report convinced investors that the Fed would cut 50 bps during September’s meeting, thus bringing easier financial conditions. Markets rallied there on out and gained 5.6% in the last three weeks of September.

Our Winners: Power and Housing

At the end of the third quarter, the Tech sector was the largest underweight in our portfolio. Much of the portfolio’s gains came from the Industrial sector, which is home to one of our favorite themes: power demand and grid infrastructure. GE Vernova (GEV) was the second-best performing stock in the S&P 500 at +52% and is one of our top holdings. GEV’s install base of gas and wind turbines expose the company to 30% of global electricity production. A few other holdings include D.R. Horton (DHI), 3M (MMM), and IBM (IBM), which were all top performers in the S&P 500 in 3Q gaining 39%, 35%, and 26% respectively.

One of our more controversial picks from the third quarter was a new position in CrowdStrike (CRWD). We viewed CRWD’s -41% selloff as overdone and “quality on sale” for the #1 player in the cybersecurity market. CRWD has a strong management team that showed resiliency through the bugged update; CRWD CEO George Kurtz immediately released a note stating that it was not a cyberattack and joined CNBC that morning to answer questions.^[4] CRWD is up 43% since it bottomed on August 5 and cybersecurity remains one of our favorite long-term themes.

Chart 3: Top Performers from Our Portfolio in 3Q^[5]

A Big Quarter Awaits

The fourth quarter will likely be the most important quarter of this year with the U.S. presidential election and two FOMC meetings awaiting investors. We focus on what we know, which is the U.S. economy is growing at or above 2% with solid corporate profits. Financials kick off 3Q earnings season this Friday and we are listening for comments on the consumer, capital markets, and net interest margins. Looking forward, we will be attentive to any uptick in inflation as a byproduct of continued growth, consumer health, and lower interest rates.

^[1] Source: Bespoke Investment Group. As of September 30, 2024.
^[2] Source: J.P. Morgan. As of September 30, 2024.
^[3] Source: FactSet. As of October 7, 2024.
^[4] Source: CNBC. As of July 19, 2024.
^[5] Source: FactSet. As of October 7, 2024.