The stock market overcame a spike in volatility in the third quarter, reaching record levels again, as the Fed cut rates for the first time in four years.

KEY TAKEAWAYS

• The S&P 500 hit record highs, while the tech-heavy Nasdaq lagged the broader market.

• The Fed lowered interest rates by a half percentage point, its first reduction since 2020.

• Small cap stocks outperformed large caps, and value stocks beat growth for the quarter.

US stocks built on a strong first half, with many market indices at or close to record levels as the third quarter neared an end.1 But those gains came amid a spike in volatility unseen since the COVID pandemic.2 Fulfilling expectations that had been building for months, the US Federal Reserve in September cut interest rates—another thing investors hadn’t seen since 2020—as core inflation eased.3 Developed equity markets outside the US rose, and emerging markets were slightly higher for the quarter.4 In the bond market, US Treasuries posted price gains, sending the benchmark 10-year yield below 4%.5

The Fed’s cut to the federal-funds rate, by half a percentage point to the 4.75%–5% range, came on September 18.6 Policymakers cited the uncertain economic outlook and higher unemployment rate as part of the reasoning for lowering rates by a half point instead of a quarter point.7 It was the first rate cut since March 2020’s COVID-related market turmoil. The move came after inflation hit its lowest level since 2021, with the August core consumer price index, which excludes more-volatile food and energy items, showing prices rose 3.2% from a year earlier.8

Aside from a brief downturn in April, stocks had trended up for much of the year. But in early August and again in early September, major stock indices sank. They recovered losses both times and were higher as they neared the quarter’s end, helped by a rise after the Fed’s move. The S&P 500 Index rose 4.8% for the quarter as of September 20.9 The technology-heavy Nasdaq lagged behind the broader market, gaining 1.4%. Nvidia and the other Magnificent 7 stocks were hit especially hard during the August declines, collectively losing about $1.3 trillion in market value at one point before rebounding.10

Shares of Nvidia have risen sharply this year amid strong demand for its computer chips, which are used to power cutting-edge AI applications. In late August, the company reported second-quarter revenue of $30 billion, up a whopping 122% from a year earlier.11 Despite this, Nvidia’s share price declined following its earnings announcement. While this may seem counterintuitive, it could indicate huge earnings growth was already priced in by the market. This is further evidence that high expectations for Nvidia and the other Magnificent 7 companies could mean it’s harder for them to impress investors in the future.

Treasuries saw their longest monthly winning streak in three years, as US government bonds posted a fourth month of gains in August.12 Prices continued to rise in September, sending yields lower, with the benchmark 10-year yield declining to 3.73% as of September 20, more than a percentage point off its recent peak in October 2023. US Treasury yields decreased across the curve, and the 10-year yield rose above the 2-year.13 The reverse—a yield curve inversion—had been the case for just over two years. 

Vigor in Value

Globally, value stocks and small caps outperformed their growth and large cap counterparts during the third quarter. Through September 20, value stocks—or those with low relative prices—outdid growth stocks by 5.4 percentage points. Small cap stocks also shined, outperforming large cap equities by 2.4 percentage points as of September 20. However, high profitability stocks lagged low profitability stocks by 2.0 percentage points in developed markets and 1.4 percentage points in emerging markets as of August 31, the latest data available.14

Value stocks were winners versus growth stocks, as the latter underperformed the broader market. But that dichotomy has not been the norm. Between 1927 and 2023, there were 58 years when value stocks outperformed the broader market; in fact, growth’s return was negative in only 17 of those years. On the other hand, value’s average return in years when the value premium was positive markedly exceeded its long-run average return, as Exhibit 1 shows.

Exhibit 1: Up and Away

Average annual returns for US value and growth, 1927–2023

In other words, value stocks have posted strong relative returns not only because growth stocks fell, but also because value delivered a strong absolute performance. This is a good reminder of the importance of focusing on premiums over the long term, and of avoiding the temptation to view one in relation to the performance of another.

Eyes on November

Amid the market activity, the US presidential election approached, with a late shake-up atop the Democratic ticket changing the contours of the race. National polls showed a tight contest, with no clear front-runner ahead of Election Day. Citizens can understandably have strong feelings about the outcomes of political races. But when thinking about investments, they may take heart that history shows the president is only one of many inputs to the market. Stocks have generally trended higher regardless of who is in office. At a time when passions may be running high for many, it’s a reminder that taking the long view can be a source of reassurance.

Quarterly Market Review

Third Quarter 2024 

This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets. The report concludes with a quarterly topic.

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