Markets ended the second quarter grappling with uncertainties over the direction of interest rates and the upcoming presidential election. However, the third quarter provided clearer answers on both fronts, which the market had been eagerly awaiting. At the same time, Artificial Intelligence (AI) continues to be a central focus for corporate strategies, and the Federal Reserve (Fed) has started moving monetary policy back toward neutral.
Major indices responded positively to early signs of the Fed easing its policy. While a few top-performing stocks led gains in the first half of the year, the third quarter saw a broader market rally. The Dow Jones Composite Average surged 9.34%, nearly double the returns of the S&P 500 and Bloomberg U.S. Aggregate Bond Index,
which posted gains of 5.8% and 5.6%, respectively. In an interesting twist, the bond index rose at nearly the same pace as the S&P 500. Meanwhile, the Nasdaq Composite experienced more volatility, as mixed earnings reports left uncertainty over which companies would emerge as AI leaders.
The Federal Reserve followed through on its earlier signals, delivering a 50-basis-point cut to the Fed Funds rate. This move was largely anticipated by bond markets, as the Fed had been transparent about its intentions. The focus has now shifted from curbing inflation to supporting the labor market. Unemployment remains at a healthy level, around 4%, but historically, when unemployment starts to rise, it tends to accelerate—an outcome the Fed is keen to avoid. The pace and timing of future rate cuts will depend on how quickly unemployment increases.
With the stage set for the 2024 presidential election, both parties have finalized their tickets, and the specifics of their policies are gradually emerging. It promises to be a month full of headlines, and while political noise can be distracting, many analysts anticipate a split government, with one party controlling the White House and the other leading Congress. Historically, this scenario leads to minimal legislative change, a situation markets tend to favor. Stability allows businesses to adapt and thrive as long as they understand the regulatory landscape. As we’ve consistently advised, it’s wise to keep politics out of your portfolio. The policies being discussed now are unlikely to translate into law in the near term. We strongly recommend avoiding investment decisions based on political predictions.
As we move into the fourth quarter, uncertainties still loom, and while many predicted a recession by now, the economy has remained resilient. What remains certain is that no one can predict every twist and turn ahead. The wisest course of action is to stay the course with your financial plan. Strong businesses will continue to adapt and serve their customers, weathering short-term challenges. By maintaining a well-diversified portfolio that includes high-quality companies, you position yourself to participate in their long-term success.