Global equity markets sustained their upward trajectory in the third quarter, although the ride was bumpier than in previous months. Several key factors contributed to this volatility, including concerns about the U.S. economy and labor markets, the unwinding of the USD-Yen carry trade, global central banks beginning their rate-cutting cycles, and China’s announcement of a significant economic stimulus package. Investors witnessed a long-awaited rotation, as the previously concentrated leadership of U.S. technology stocks stepped back to allow outperformance from other sectors and regions. Bond markets also benefited, as global interest rates declined in anticipation of accommodative monetary policy and favorable inflation trends.
Domestic Equities
US equity markets were particularly impacted by the volatility, witnessing rapid and large swings not seen for some time. Weakening employment data, coupled with concerns that corporate AI investment might not deliver tangible earnings results instigated a correction, causing the S&P 500 to decline nearly 10% from its peak. The selloff intensified as rising expectations for more aggressive rate cuts from the Federal Reserve, along with the Bank of Japan’s decision to raise its policy rate, led to an unwinding of the popular USD-Yen carry trade, creating additional selling pressure.
However, stocks found their footing in the back half of the quarter, supported by resilient economic data, falling inflation figures, and Q2 corporate earnings that reassured anxious investors. The Federal Reserve’s decision to kickstart its rate-cutting cycle with a 0.5% “catch-up” cut, rather than the expected 0.25%, further lifted short-term market sentiment. This move signaled a willingness to adjust policy to support the economy if needed. As equities rebounded, the sector rotation hinted at in Q2 gained traction. The market leaders of the last few years largely took a back seat as other areas of the market, primarily interest rate sensitive areas like utilities, real estate, and financials, outperformed. Despite the early turmoil, the S&P 500 returned 5.8% for the quarter, reaching a new all-time high.
Foreign Equities
The MSCI ACWI ex-USA index gained 8.2% for the third quarter of 2024.
Eurozone
Eurozone equity markets largely followed the global rally, driven by expectations of lower interest rates worldwide. The European Central Bank lowered its benchmark interest rate by 25 basis points during its September meeting, as inflation data continued to show a sustained downward trend. Markets anticipate further cuts, with the central bank aiming to support the economy through looser monetary policy amidst ongoing concerns about regional slowdowns. The MSCI EMU Index gained 7.3% for the quarter.
UK
Similar to the Eurozone, UK equities delivered strong performance for the quarter, supported by the Bank of England’s first rate cut in four years, implemented in August. While investors anticipate further rate reductions, a recent uptick in inflation may lead the BoE to proceed more carefully. The outcome of the summer’s general election also boosted investor sentiment. As a result, the MSCI UK All Cap Index posted a solid return of 8.5%.
Japan
Japan faced its own unique set of interest rate and political dynamics during the third quarter, but in a different direction from other markets. The Bank of Japan raised interest rates, triggering a repricing in equity markets and a significant swing in the yen. The outcome of Japan’s prime minister race, with the victor viewed as less economically supportive by investors, added further downward pressure on the market. As a result, the unhedged MSCI Japan Index declined by 5.8%.
Emerging Markets
Emerging markets experienced a volatile quarter, starting with a sharp decline in equity prices before rallying strongly in the second half. Early struggles in the technology sector and the ripple effects of the Bank of Japan’s rate hike fueled the initial selloff. However, the commencement of global rate-cutting cycles, particularly in the U.S., along with China’s announcement of a massive stimulus package, helped push these markets higher. Thailand and South Africa were among the top performers, while Brazil and Korea lagged the broader EM performance. The MSCI Emerging Markets Index finished the quarter with a gain of 8.9%.
Fixed Income
In the third quarter of 2024, fixed income markets experienced strong performance due to the cooling of inflation and central banks’ shift toward easing monetary policy. The Barclays Global Aggregate Index returned 7.0% for the quarter, with government bonds and credit delivering solid gains. U.S. Treasuries rose by 4.7%, and European sovereign bonds increased by 4.0%, while UK Gilts underperformed slightly with a 2.4% return. The narrowing credit spreads supported investment-grade and high-yield bonds, with emerging market debt also rallying by 6.1%.
US Treasuries
U.S. Treasuries posted strong returns, rising by 4.7%. This performance was driven by the Federal Reserve’s decision to begin cutting interest rates amid cooling inflation and the labor market showing signs of material weakness. The yield curve shifted as shorter-dated yields fell more sharply than longer-dated ones, leading to a reduction in yields across the board.
Corporate Credit
Investment-grade credit spreads tightened slightly, with the sector posting a 6.3% quarterly return, bringing year-to-date performance back into positive territory. High yield bonds also performed well, benefiting from the broader market optimism and lower interest rates, with returns of 5.3% in the U.S. and 3.5% in Europe. The tightening spreads in both investment-grade and high-yield markets reflected strong demand, driven by improved sentiment around future rate cuts.
Global Bonds
Global bonds posted strong returns in the third quarter of 2024, buoyed by lower interest rates across major central banks. The Barclays Global Aggregate Index returned 7.0% for the quarter, driven by falling yields and expectations of continued monetary easing. European sovereign bonds delivered a 4% return as central banks, including the European Central Bank, cut rates to support their economies. UK Gilts, however, lagged with a 2.4% return, as the Bank of England was more cautious due to elevated wage growth. Emerging market debt also rallied, returning 6.1%.
Alternatives
In Q3 2024, private equity faced reduced deal activity amid high interest rates but saw a robust secondaries market as institutions sold stakes to rebalance portfolios, notably through secondary buyout transactions. Private credit thrived, filling the void left by traditional banks post-Silicon Valley Bank’s collapse, with distressed credit managers capitalizing on rising corporate defaults to negotiate favorable terms.
Hedge funds delivered strong returns, particularly macro strategies, which benefited from global volatility, while equity hedge funds capitalized on high dispersion in sector returns, especially in energy and AI. In venture capital, the IPO market remained sluggish despite successful listings like Reddit and Rubrik, with a focus on AI and fintech funding.
Within commodities, oil prices experienced volatile swings due to Middle East tensions and softened Chinese demand. Real estate continued to struggle, particularly in the office sector, though industrial and multifamily properties performed well. Lastly, digital assets faced regulatory challenges but saw institutional interest in blockchain projects and tokenized real assets, with firms like BlackRock expanding their product offerings to include Crypto spot ETFs for bitcoin and Ethereum, as well as tokenized funds.
Q3 2024 Market Commentary
Global equity markets sustained their upward trajectory in the third quarter, although the ride was bumpier than in previous months. Several key factors contributed to this volatility, including concerns about the U.S. economy and labor markets, the unwinding of the USD-Yen carry trade, global central banks beginning their rate-cutting cycles, and China’s announcement of a significant economic stimulus package. Investors witnessed a long-awaited rotation, as the previously concentrated leadership of U.S. technology stocks stepped back to allow outperformance from other sectors and regions. Bond markets also benefited, as global interest rates declined in anticipation of accommodative monetary policy and favorable inflation trends.
Domestic Equities
US equity markets were particularly impacted by the volatility, witnessing rapid and large swings not seen for some time. Weakening employment data, coupled with concerns that corporate AI investment might not deliver tangible earnings results instigated a correction, causing the S&P 500 to decline nearly 10% from its peak. The selloff intensified as rising expectations for more aggressive rate cuts from the Federal Reserve, along with the Bank of Japan’s decision to raise its policy rate, led to an unwinding of the popular USD-Yen carry trade, creating additional selling pressure.
However, stocks found their footing in the back half of the quarter, supported by resilient economic data, falling inflation figures, and Q2 corporate earnings that reassured anxious investors. The Federal Reserve’s decision to kickstart its rate-cutting cycle with a 0.5% “catch-up” cut, rather than the expected 0.25%, further lifted short-term market sentiment. This move signaled a willingness to adjust policy to support the economy if needed. As equities rebounded, the sector rotation hinted at in Q2 gained traction. The market leaders of the last few years largely took a back seat as other areas of the market, primarily interest rate sensitive areas like utilities, real estate, and financials, outperformed. Despite the early turmoil, the S&P 500 returned 5.8% for the quarter, reaching a new all-time high.
Foreign Equities
The MSCI ACWI ex-USA index gained 8.2% for the third quarter of 2024.
Eurozone
Eurozone equity markets largely followed the global rally, driven by expectations of lower interest rates worldwide. The European Central Bank lowered its benchmark interest rate by 25 basis points during its September meeting, as inflation data continued to show a sustained downward trend. Markets anticipate further cuts, with the central bank aiming to support the economy through looser monetary policy amidst ongoing concerns about regional slowdowns. The MSCI EMU Index gained 7.3% for the quarter.
UK
Similar to the Eurozone, UK equities delivered strong performance for the quarter, supported by the Bank of England’s first rate cut in four years, implemented in August. While investors anticipate further rate reductions, a recent uptick in inflation may lead the BoE to proceed more carefully. The outcome of the summer’s general election also boosted investor sentiment. As a result, the MSCI UK All Cap Index posted a solid return of 8.5%.
Japan
Japan faced its own unique set of interest rate and political dynamics during the third quarter, but in a different direction from other markets. The Bank of Japan raised interest rates, triggering a repricing in equity markets and a significant swing in the yen. The outcome of Japan’s prime minister race, with the victor viewed as less economically supportive by investors, added further downward pressure on the market. As a result, the unhedged MSCI Japan Index declined by 5.8%.
Emerging Markets
Emerging markets experienced a volatile quarter, starting with a sharp decline in equity prices before rallying strongly in the second half. Early struggles in the technology sector and the ripple effects of the Bank of Japan’s rate hike fueled the initial selloff. However, the commencement of global rate-cutting cycles, particularly in the U.S., along with China’s announcement of a massive stimulus package, helped push these markets higher. Thailand and South Africa were among the top performers, while Brazil and Korea lagged the broader EM performance. The MSCI Emerging Markets Index finished the quarter with a gain of 8.9%.
Fixed Income
In the third quarter of 2024, fixed income markets experienced strong performance due to the cooling of inflation and central banks’ shift toward easing monetary policy. The Barclays Global Aggregate Index returned 7.0% for the quarter, with government bonds and credit delivering solid gains. U.S. Treasuries rose by 4.7%, and European sovereign bonds increased by 4.0%, while UK Gilts underperformed slightly with a 2.4% return. The narrowing credit spreads supported investment-grade and high-yield bonds, with emerging market debt also rallying by 6.1%.
US Treasuries
U.S. Treasuries posted strong returns, rising by 4.7%. This performance was driven by the Federal Reserve’s decision to begin cutting interest rates amid cooling inflation and the labor market showing signs of material weakness. The yield curve shifted as shorter-dated yields fell more sharply than longer-dated ones, leading to a reduction in yields across the board.
Corporate Credit
Investment-grade credit spreads tightened slightly, with the sector posting a 6.3% quarterly return, bringing year-to-date performance back into positive territory. High yield bonds also performed well, benefiting from the broader market optimism and lower interest rates, with returns of 5.3% in the U.S. and 3.5% in Europe. The tightening spreads in both investment-grade and high-yield markets reflected strong demand, driven by improved sentiment around future rate cuts.
Global Bonds
Global bonds posted strong returns in the third quarter of 2024, buoyed by lower interest rates across major central banks. The Barclays Global Aggregate Index returned 7.0% for the quarter, driven by falling yields and expectations of continued monetary easing. European sovereign bonds delivered a 4% return as central banks, including the European Central Bank, cut rates to support their economies. UK Gilts, however, lagged with a 2.4% return, as the Bank of England was more cautious due to elevated wage growth. Emerging market debt also rallied, returning 6.1%.
Alternatives
In Q3 2024, private equity faced reduced deal activity amid high interest rates but saw a robust secondaries market as institutions sold stakes to rebalance portfolios, notably through secondary buyout transactions. Private credit thrived, filling the void left by traditional banks post-Silicon Valley Bank’s collapse, with distressed credit managers capitalizing on rising corporate defaults to negotiate favorable terms.
Hedge funds delivered strong returns, particularly macro strategies, which benefited from global volatility, while equity hedge funds capitalized on high dispersion in sector returns, especially in energy and AI. In venture capital, the IPO market remained sluggish despite successful listings like Reddit and Rubrik, with a focus on AI and fintech funding.
Within commodities, oil prices experienced volatile swings due to Middle East tensions and softened Chinese demand. Real estate continued to struggle, particularly in the office sector, though industrial and multifamily properties performed well. Lastly, digital assets faced regulatory challenges but saw institutional interest in blockchain projects and tokenized real assets, with firms like BlackRock expanding their product offerings to include Crypto spot ETFs for bitcoin and Ethereum, as well as tokenized funds.