Summary
With inflation remaining relatively high, fewer signs of interest rate cuts, and the uncertainties of two active wars and an approaching election, the economy and stock market have shown greater resilience than many had anticipated.
Investors went into the third quarter waiting for the all-clear sign on inflation, which would let the Fed finally cut interest rates. The economic data quickly turned in that direction, with soft readings on inflation data suggesting price pressures were at last meaningfully abating.
Although a jump in the unemployment rate sparked some fears of a recession, the broader trend indicates an economy moderating with healthy growth. The Federal Reserve cut the fed fund rate by half a percent, 50 basis points. That was a significant cut, more than the 25 basis points the majority had anticipated, and it ended the upward mark of the interest rate that we’ve had for the last two years. The inflation rate has certainly come down from where it was a couple of years ago, although it’s still hovering at 3.2% on a year-over-year basis, a rate still above the Fed’s target of 2%.
In the markets, global equities gained in the third quarter despite pronounced volatility on several occasions. The Dow Jones rose by +8.26%, S&P 500 gained +5.51%, and the Nasdaq was up by +5.01% over the same 3-month period.
The Fed’s policy shift has directly influenced the mortgage market, lowering the average 30-year fixed mortgage rate to 6.23%, down from 6.4% in the prior month. The decline in borrowing costs enhances housing affordability, effectively increasing buyer purchasing power and stimulating renewed demand.
As mortgage rates decrease, the housing market has become more competitive. However, market liquidity remains sluggish, with average days on the market extending to 55 days—marking the slowest September turnover in five years. At the same time, more sellers are lowering their prices, with 18.6% of listings seeing reductions as they adjust to changing market conditions and what buyers can afford.
Our Rise real estate portfolio delivered a solid 3.39% return in Q3 2024, with a September return of 1.14%, which aligns with our historical performance. While home values are declining in the blue areas where we hold properties, we haven’t felt the impact yet. However, if this trend persists, our portfolio could be affected. We plan to capitalise on this market shift by expanding our holdings and seizing new buying opportunities.
On the fixed income front, U.S. Treasury bond yields saw a significant decline by the end of the quarter as investors factored in the potential for FOMC interest-rate cuts. The 2-year Treasury yield made an especially striking move, dropping 1.11% to 3.64%, while the 10-year Treasury yield also fell 62 basis points, settling at 3.78%, resulting in the yield curve un-inverting for the first time in a while. This shift signals a reduced likelihood of a recession in the near future, reinforcing the ongoing strength of the economy.
Despite the notable drop in bond yields during the third quarter, they remain appealing across various fixed-income categories. This holds true for Treasuries, investment-grade, high-yield, and municipal bonds. While yields are lower than earlier in the year, investors still benefit from risk-managed assets that generate solid returns.
Risevest’s Fixed Income portfolio returned 2.49% for the quarter and 0.83% for the month of September as expected.
Looking ahead, we anticipate one more rate cut from the Fed this year, which could further lower bond yields. We expect investors to adjust their pricing in the fixed income market accordingly.
As we head into the final quarter of 2024, we believe the U.S. is at an inflection point with respect to monetary policy. We are likely entering a lower inflation environment coupled with steadily decreasing short-term interest rates. The first cut in rates in September was no surprise, while the magnitude of the forthcoming cumulative decrease in the Fed rates during this cycle will prove to be important.
Attention is also turned to the forthcoming US election on 5 November as it’s certainly going to bring some volatility all the way around.
STOCKS YTD 12.1 , Sept: 1.23
The US shares advanced over the quarter as all sectors except energy (-2.9%) posted positive returns. Top performing sectors included utilities (+19.3%) and real estate (+17.7 %). Information technology, which we have significant exposure to, posted only a small advance (+1.2%). However, AI themes boosted other sectors, such as utilities, benefiting from rising electricity demand for data centres.
Year-to-date, our stock portfolio has returned +12.1%; for September, it gained 1.23%. Moving forward, as earnings season begins in earnest, some of our portfolio companies kick off the season with JP Morgan and ASML reporting later this week.
At Rise, we are more concerned about fundamental analysis and valuations with a focus on long-term sustainable growth. However the prevailing macro data adds up to a slightly more cautious outlook as we continue to track early signs that the economy may be shifting and its impact on our portfolio.
REAL ESTATE Q3:3.39, Sept: 1.14
Our Rise real estate portfolio returned 1.14% for September, and the total return for the 3rd quarter was 3.39%, bringing our year-to-date performance to 10.01%.
We’re beginning to notice a decline in home values in certain blue regions, particularly in Florida, Texas, and Louisiana. This drop can be linked to the 50-basis-point rate cut in September. While this hasn’t significantly impacted our portfolio yet, a continued downward trend could have future implications. On the bright side, it opens up better buying opportunities for us.
Our outlook for the remainder of the year says that the 30-year and 15-year mortgage rates will remain between the low 6% and high 5%. The mortgage rates will depend on the state of the economy, the job market, what the Fed does and more.
FIXED INCOME Q3: 2.49, Sept: 0.83
Risevest’s Fixed Income portfolio returned 2.49% for the quarter and 0.83% in September as expected. U.S. treasury bond yields dropped sharply in Q3, with the 2-year Treasury down 111 basis points to 3.64% and the 10-year falling 62 basis points to 3.78%. Despite this decline, yields across treasuries, investment-grade, high-yield, and municipal bonds remain attractive. Investors are still able to generate income while managing risk. Looking forward, we expect the Fed to implement another rate cut this year, which may push bond yields even lower. As a result, we anticipate investors will adjust their pricing strategies in the fixed income market.
Conclusion
We remain vigilant regarding asset price inflation, carefully observing elevated valuations, growing market concentration, and the potential effects of shifting interest rate policies on a prolonged bull market.