Q3 2024 - Market Summary
Most global markets finished the quarter in positive territory. The most notable change on the quarter was what led the markets higher. The march higher was led by stocks other than the megacap tech stocks, instead U.S. small, mid, developed international, and emerging markets all topped the traditional market-cap weighted S&P 500 index. Fixed income or bonds also had strong gains in third quarter, most of those gains coming ahead of the late September interest rate cut.
Impact of the Yen Carry-Trade on Global Markets
While returns for the quarter were positive it wasn't a straight shot higher. Global stocks moved lower in August due to an unwinding of the Japanese yen carry-trade. Investors had borrowed yen at Japan's low interest rates to invest in higher-yielding assets elsewhere. When the Bank of Japan raised interest rates unexpectedly in July, the yen strengthened, making it costly to repay these yen-denominated loans. This triggered widespread selling of risky assets, causing declines in global stock markets, currency volatility, and increased risk aversion, especially as the U.S. Federal Reserve signaled a potential cut to the Fed Funds rate. This sort of volatility is a reminder that our financial markets are inter-twined to what happens outside of the U.S.
Lower Path of Interest Rates Reduces Borrowing and Strengthens US Dollar
China stocks jumped +23.7% in Q3 (largely in the last three weeks of September) after the country announced a stimulus package aimed at monetary policy, real estate, and the stock market pulling the broader emerging market index up with it. As markets grew more confident in a dovish path for interest rates in the U.S. sentiment moved in the favor of the more indebted companies who could potentially refinance cheaper (e.g., small-mid Cap stocks) and those who benefit from a weaker dollar (e.g., non-U.S. stocks).
Bonds Soar ahead of Fed Interest Rate Cuts
Even before the Fed cut rates by 0.5%, markets began anticipating an aggressively dovish central bank in the coming quarters, helping bonds rebound strongly in Q3. The Bloomberg Aggregate Index rose more than 5% for the quarter, bringing YTD returns well into positive territory. Municipal bonds rose as well (+2.7%). The 10-year treasury finished September yielding just under 3.8%, continuing the roller coaster that had it as low as 3.6% and as high as 4.7% thus far in 2024. The bounce in core bonds did little to upset continued strength in satellite fixed income. High yield bonds rose 5.3% while bank loans rose 2.1%. Both remain ahead of core taxable bonds YTD. High yield municipals rose 3.2% during the quarter, extending their lead relative to core municipal bonds for the year.
The Fed cut and presumed dovishness also helped other risk assets. More levered areas like real estate and infrastructure saw some stability, with public leading private for the quarter. Private credit strategies put up another solid quarter, with fixed rate areas outperforming floating. In the commodities space, it was another quarter of haves and have nots. Crude oil and natural gas prices fell more than 10% in Q3, offset by a comparable rise in select precious metals and softs (e.g., coffee and sugar).
