Putting last week’s major events into context

Last week marked the end of an eventful third quarter. As we look to the months ahead, we thought it apt to check in on where we stand: 

• The S&P 500 gained for the fourth straight quarter, +5.5%, making 18 new highs.
• The S&P 500 returned +21% through the first three quarters of 2024, its best performance since 1997.

• Of the companies in the S&P 500, 78% notched positive total returns, while the average constituent performed 1.7x times better than the broad index.
• The S&P 500 was positive in September for the first time since 2017. This is only the ninth time since 1950 that the index has started the year with gains in eight of the first nine months. When that happened in the past, the S&P 500 added an average return north of 6% through year-end.
• Throughout the third quarter, sectors with characteristics such as sensitivity to interest rates and strong dividend yields (e.g., real estate and utilities) moved into favor. Technology and consumer discretionary, the first half’s leaders, were the third quarter’s only underperformers at the sector level alongside energy.
• Rate-sensitive small caps (+9.6%) logged their second-best quarter since early 2021.
• Chinese equities (CSI 300) had their best day in four years thanks to a flurry of Chinese policy announcements, and ended the quarter up +15.5%.
• U.S. Treasuries rallied in the quarter, notably steepening. The 2s10s curve flipped positive in early September after being inverted since mid-2022. Gold (+14.7%) enjoyed its biggest gain since Q1 2016.
• Second-quarter U.S. GDP grew at a 3.0% pace, and prior years were revised higher. In the details, the household savings rate was also revised up to 5.2% from a previously reported 3.3%. The same release showed that corporate profits rose to a near-record 13.2% of GDP.
• The Federal Reserve delivered its first rate cut of the cycle and the release of September jobs data put a bow on the third quarter, with a pick-up in payroll additions, a tick lower in the unemployment rate and solid wage gains.

The fourth quarter got off to a rocky start last week due to escalating geopolitical risks in the Middle East and key macroeconomic data releases. While the strike at East Coast ports added additional uncertainty, based on last week reports it seems as if the longshoremen have agreed in principle to a deal that would alleviate the potential economic pressure associated with a prolonged strike.

After the market closed on Friday, the S&P 500 finished up +0.2% for the week and Treasuries climbed, with the 2-year Treasury jumping to 3.92% and the 10-year Treasury increasing to 3.97%.

Elsewhere, “safe-haven” assets linked closely to increased global tensions made moves. Gold fell by 0.1% meanwhile oil spiked +8.9%. Investors also received the latest employment data. The bottom line? The labor market appears to be holding steady. Layoffs are lower than at any point before the pandemic, and workers are quitting their jobs at the slowest pace since 2015.

As we move further into the final quarter of 2024, we want to first give you the need-to-knows on the key global developments from last week and what they may mean for your portfolio. 

Geopolitical tensions have escalated

Conflict in the Middle East. Our job as investors is to assess what impact the conflict might have on the global economy and financial markets, and then determine if we need to change the advice we are giving about portfolios. But first, here are the facts as we understand them.

Last Tuesday, Iran launched an airborne attack on Israel. The retaliation comes after a massive air strike in Beirut resulted in the death of Hassan Nasrallah, Hezbollah’s leader.

According to the Israeli Defense Forces, many of the missiles had been intercepted, but several made landfall in the south and central parts of the country. This escalation is a significant development in the ongoing conflict that began in October 2023. While the war has remained somewhat contained, increased involvement from Iran has left global leaders concerned about the prospects of a wider war.

While U.N. and G7 leaders have called for proportional responses to avoid further escalation, Israeli authorities are preparing for a “significant retaliation” against Iran for its missile attack, with potential targets including Iran’s oil production facilities and nuclear sites. In the meantime, the Israeli military launched another air strike on Beirut, and troops continue to engage in close-range combat with Hezbollah across Southern Lebanon.

Israeli officials are consulting with the Biden administration, anticipating the need for U.S. defensive cooperation should Iran retaliate further. So far, President Biden has urged restraint, specifically against targeting Iran’s nuclear sites.

Today, our investment approach recognizes the world’s inherent uncertainties and fragilities. Our investment view is not predicated on declining global conflict.

In all, the market seems very much aware of the conflict in the Middle East. Asset classes that are most sensitive to geopolitical risk have moved in a way that is consistent with our expectations. Oil spiked by around 9% last week, while gold has remained near all-time highs.

When it comes to oil, excess supply (the United States is producing about 13.4 million barrels per day alone, while OPEC+ is still set to start raising output by January after months of production cuts) along with subdued demand should help keep the price gains contained. All of this is subject to change if we do see material escalation, but our understanding of how broader markets have behaved around similar geopolitical events suggests that the economic backdrop and business cycle are the key dynamics to watch (see our thoughts here).