The overall market performance remained strong in the third quarter, with the S&P 500 gaining 5.3%. It was a broad rally, with the S&P 500 equal weight index returning nearly 10%, following a lengthy period when a small number of mega-cap companies accounted for nearly all the gains. For example, in the previous quarter the six companies with trillion-dollar valuations had surged 16.8%, while the other 494 companies had declined 0.8%.
Inflation expectations and interest rates remained front and center for most investors. Going into 2024, market participants expected six rate cuts in 2024, taking Fed Funds down to approximately 4%. On September 18th, the Fed finally made the first cut of 50 basis points and signaled that further reductions were on deck. This policy shift provided a nice lift for interest rate sensitive companies and for the entire small cap universe – the Financial sector Index XLF (Financial Select Sector SPDR Fund) and Small Cap 600 rallied 10.4% and 12.5% respectively for the quarter.
On another positive note, corporate earnings were terrific with profits exceeding analysts’ expectations for the sixth consecutive quarter. Roughly 80% of S&P 500 companies reported earnings that beat expectations, as companies posted an 11% year-over-year increase. It was the strongest quarterly earnings growth since the rebound in the fourth quarter of 2021 coming out of the pandemic.
The yield on the 10-Year Treasury moved 54 basis points to 3.8%, returning to its trading range from September 2022-July 2023. As interest rates declined so too did the U.S. dollar, which ended the quarter down 5%, back to its exchange rate from July 2023.
Gold rose more than 12.0% in the third quarter and nearly 30% in 2024 to date as anticipated interest rate cuts by central banks supported trading precious metals. In addition, higher demand for gold by several Asian central banks that are reducing their dollar holdings, particularly the People’s Bank of China, helped lift the price of gold, which reached a record high of $2,660 per ounce in May. Crude oil prices were volatile due to the continued unrest in the Middle East but settled at $68.75 per barrel on the last business day of September, down 20% from the beginning of the quarter.
Another positive development was the decline in home mortgage rates from almost 7% at the beginning of the quarter to just over 6% by the quarter’s end. Nevertheless, existing home sales remained very constrained, as homeowners that locked in much lower mortgage rates were reluctant to move. With that lack of supply on the market, existing home prices continued to rise, contributing to some stickiness in the inflation data. “Shelter” costs represent approximately 35% of the CPI basket. We believe the trend in lower mortgage rates could relieve that stickiness, and further strengthen the economy.
We remain optimistic about the health of the U.S. economy, with moderate inflation and slow & steady growth. We believe that the Fed will be rational and continue to move rates towards more reasonable levels, and that investors will act intelligently and continue to broaden their holdings outside of the artificially high momentum stocks and into other equities offering greater value propositions.
We appreciate your continued confidence in North Star. Please feel free to contact us with any questions.