Investment Review for Third Quarter 2024

Inflation subsides.

Inflation has been a significant concern for a while. Following the reopening of the economy after the COVID-19 pause, a mix of substantial stimulus, pent-up demand, and supply chain issues caused prices to soar.  Inflation, measured by the consumer price index, rose from near zero to over 9% in two years. To address the rising prices, the Federal Reserve began raising interest rates in March 2022, doing so 11 times for a total increase of 5.25%. These measures, along with other restrictive actions, helped bring inflation under control. As of the most recent reading, consumer prices have increased by a more modest 2.5% over the past 12 months.

Job creation slows.

Similar to the inflation story, job creation increased as the government poured extreme amounts of stimulus on the economy following the COVID-19 shutdown. Job creation exceeded 600,000 new positions per month during 2021, but began to slow as the Federal Reserve raised interest rates to help combat inflation. By the third quarter of 2024, job creation had slowed to just 185,000 new positions per month. 

A cut in interest rates.

With inflation down to 2.5% and the labor market softening, the Federal Reserve began normalizing interest rates during their September meeting, cutting short-term interest rates by 0.50%. Additionally, on September 18, the Federal Open Market Committee released its Summary of Economic Projections. In that report, Federal Reserve participants indicated that another 0.50% reduction in interest rates was likely before year-end, and a further 1.0% reduction in 2025 might be appropriate.   

China starts to stimulate.

Over the past 30 days, China has taken several steps to boost the economy and address various financial challenges. 

•    The People’s Bank of China (PBOC) lowered the benchmark seven-day reverse repo rate from 1.7% to            1.5% to increase liquidity in the banking system. 

•    Existing mortgage rates were reduced by about half a percentage point on average. 

•    The PBOC also reduced the reserve requirement ratio by 0.50%, allowing banks to increase lending,              which is expected to add 1 trillion yuan ($140 billion) in liquidity. Officials have suggested that a further            0.25% to 0.50% cut in the reserve ratio might be forthcoming. 

•    $113 billion of liquidity support will be provided for stock purchases, with the potential for more. 

•    The PBOC will now cover 100% of the principal for loans to local governments for purchasing unsold              homes, up from 60%. 

•    Measures were also introduced to support the property market, including lowering down payment                  requirements for second homes from 25% to 15%.

Emerging markets.

Risky assets performed well in the third quarter, with significant gains coming from previously less favored areas. The standout performer, Chinese stocks, which surged 23.5% following stimulus announcements late in the quarter. In contrast, other emerging markets saw a more modest rise of 4%.  

Global real estate and infrastructure, both sensitive to interest rates, grew by 15.9% and 13.4%, respectively, as market sentiment shifted with changes in interest rate policy.

Additionally, foreign-developed small-cap stocks rose by 10.3%, while U.S. small-cap stocks increased by 10.1%.