Initiating the Descent
In our 3Q 2024 commentary we delve into the key drivers behind market performance, focusing on five key questions:
1. U.S. stocks had a strong third quarter, especially small and mid-caps. Why did the broader market rebound? We believe many smaller companies hurt by rising costs and rising interest rates may benefit from the anticipated decline in rates, potentially prompting investors to purchase more small caps.
2. The Federal Reserve began its “initial descent” in September with a 50-basis point cut in the fed funds rate. What are the implications for the broader economy? We believe investors should manage their expectations regarding the initial rate cut’s impact. While the Fed’s move signals a return to more typical interest rate levels, we do not expect ultra-low rates returning soon.
3. What are expectations for a “soft landing” versus “hard landing” and the impact on equities of varying market capitalizations? Relative to small caps, large cap earnings have been more resilient amid inflation, but we believe that large caps will face challenges growing earnings over the next 12-18 months, while small caps may have more room to run.
4. A rising tide does not necessarily lift all boats. What is the role of quality right now? In our view, investing in quality companies is crucial not only in tough times, but we also believe they are better able to adapt and seize new opportunities across a market cycle.
5. Are consensus expectations for 2025 realistic? Should investors be optimistic or concerned? While we view the economic picture to be relatively balanced between
opportunities and risks, we do think valuations could be a risk if lofty investor expectations are not met.
You can also listen to our Q3 analysis in episode 263 of our stock market podcast, KayneCast.
