Q4 Look Ahead [Equity Markets]

October 1st, 2024

RECAPPING LAST WEEK

China’s central bank and politburo unveiled the biggest stimulus package since the pandemic, sending their country’s equity markets soaring and lending support to global stocks. U.S. equity index gains were muted, though, as investors fretted over our labor market outlook and a change in Japan’s leadership. The Nasdaq Composite index rose 1%, while the S&P500 added 0.6% and the Russell 2000 was flat. International emerging markets surged more than 6%, while non-U.S. developed markets jumped 3.5%. S&P500 sector returns titled positive, led by cyclical sectors like basic materials as most commodities received a lift from China’s news.

The PHLX Semiconductor index continued its rebound, spiking 4.5% and lifting the technology sector. Not all commodities saw gains, however—oil prices, for example, plunged nearly 4% after Saudi Arabia ditched its unofficial $100 per barrel target price and announced the country was prepared to increase production in December despite low prices. Gold futures added 1%, hovering near record highs.

U.S. inflation continued to trend lower, with the headline PCE index rising just 0.1% in August, which brought the annual rate down to +2.2%. Personal income and spending increases came in below forecasts. The U.S. economy appeared to be on track for a solid third quarter; the flash composite PMI was well into the above-50 expansion zone, registering 54.4 this month. The final Q2 GDP reading was +3.0%, and estimates for Q3 are similar. A sharply lower consumer confidence reading
reflected Americans’ growing concerns about a cooling jobs market. While weekly jobless claims remained low at 218k, the ratio of respondents that viewed jobs as “plentiful” versus “hard to get” was the lowest since March 2021.

The housing market saw modest improvement in pending home sales as buyers anticipated lower mortgage rates, but new home sales were still hampered by record prices and an inventory shortage. Overseas, China’s stimulus measures (detailed below) sent the country’s equity indices higher by nearly 20%, the biggest weekly gains since 2008. In Japan, the yen jumped, and Nikkei 225 index futures sank 4.5% in Friday’s after-hours session after former defense minister Shigeru Ishiba won a run-off election to become the country’s next prime minister. Ishiba has endorsed the Bank of Japan’s stance of moving away from decades of ultra-loose and yen-weakening monetary policy. Tokyo’s core inflation rose 2% in September, supporting market expectations for another rate hike before year-end. The Reserve Bank of Australia kept interest rates steady, and its statement indicated that rate cuts are not on the near-term horizon as inflation
remained above target. Last of all, European business activity contracted unexpectedly as France—
the EU’s second-largest economy—saw the prior month’s Olympics boost wear off.

THE WEEK AHEAD

As the calendar transitions to October, and we enter the final quarter of the year, all eyes will be on the U.S. labor data. China’s PMI reports on Sunday evening, which arrive on the heels of a massive equity rally, may set the week’s early trading tone. In the U.S., Friday’s non-farm payrolls report— and the other jobs data that precede it—may provide clues both on the economy’s direction, as well as how aggressively the Fed might cut interest rates later this year. FOMC Chair Powell is scheduled to speak today, and there are numerous scheduled appearances by other committee members throughout the week.

The rest of the U.S. agenda includes ISM manufacturing and services PMIs along with factory orders. In Europe, Germany’s CPI report lands today, followed by the wider Eurozone on Tuesday. With inflation easing, markets are pricing in two more potential rate cuts by year end. Minutes from the recent ECB meeting will be released on Thursday. Wednesday’s OPEC meeting may garner increased attention even though no output decisions are expected until the December gathering. Finally, Japan’s BOJ Summary of Opinions, Tankan surveys, and industrial
production round out the international calendar.

(Source: Schwab)

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Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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