Despite an 8.5% swoon at the end of July and into August, the S&P 500 (Total Return) Index gained 5.89% in the 3rd quarter and is ahead by 22.08% for the year.
Almost every asset class has been in on the action. Real Estate Investment Trusts (REITs) gained 16% for the quarter, fueled in large part by the Fed’s decision to lower rates.
The long dormant value premium continues to tease a little bit. Large Cap Value gained 9.43% and Small Cap value gained 10.15% in the quarter. Significantly out performing their growth counterparts. That the stock market isn’t just about Large Cap Growth AI stocks any more is a very refreshing development for investors.
International Markets Outperform
The EAFE Developed Market Index rose by 7.26% and the Emerging Market Index gained 8.72%; boosted by China’s whopping 23.64% gain in the quarter.
Fixed Income
The big news was that after two and a half years of raising and maintaining short-term interest rates, the Federal Reserve, believing inflation is under control, finally made its first cut. And it was a relatively big one of one-half a percent. Inflation has fallen from its 9.1% peak in 2022 to around 2.5%.
Additionally (and importantly) with the increase in rates since 2022, bonds returned to doing their job of dampening portfolio volatility during the market’s July drawdown, gaining 2.2% during that three-week period.
As usual, our friends at Dimensional Funds have all the details in their Quarterly Market Review.
How Much Cash to Hold? With the Fed in what is believed to be early stages of cutting rates, the halcyon days of money market funds may be coming to an end; causing investors to give more thought to how much cash they should carry. The yield curve has been restored to its normal upward sloping character; meaning longer term rates are higher than shorter term rates. So investors who have been biding their time holding greater than typical amounts of cash have to begin thinking more clearly about their longer term bond strategy.
Trees Don’t Grow to the Sky
That quote is generally attributed to John Bogle (founder of Vanguard) to indicate that stock prices simply don’t rise uninterrupted forever. They tend to be volatile in the short to intermediate run; while slowly growing with the economy over decades.
The S&P 500 has risen 22% since the beginning of the year and 34% since last September; more than triple the average 10.5% annual return since 1926.
No Time to Get Giddy
Given the relatively high valuations, geopolitical uncertainty and the uncertainty surrounding the upcoming election; it is wise to make sure you have the appropriate asset allocation and maintain sufficient liquidity to cover your spending needs.
