Market Update

Stocks hit their 44th all-time high this week. Tech (+2.5%) was the dominant sector as artificial intelligence (AI) roadshows displayed increased demand across the country.

In macro news, U.S. consumer prices rose slightly faster than expected in September. That put a pause on the recent inflation progress. There was a silver lining in the report, though. Shelter, which has proved to be the stickiest part of inflation, dropped the most month-over-month since October of last year.

The two-year (3.99%) and 10-year (4.09%) rose seven basis points and 12 basis points on the week, respectively, and 30-year mortgage rates have shot back up to nearly 7%.

In commodities, oil continues to climb. Up +1.7% this week to $79 per barrel as risks of further conflict in the Middle East escalate. Gold retreated -1% from its all-time highs.

Zooming out, stocks have been hovering near the highs for three weeks.

Are we due for a fourth quarter rally? In the rest of today’s note, we explore historical seasonal trends and the events that might affect asset class returns in the final quarter of 2024.

Spotlight

We are now two weeks into the fourth quarter. And so far, a solid economy has brought good returns year-to-date for global assets.

Can the rally continue? While past performance is no guarantee of future performance, seasonality says yes: The fourth quarter tends to provide a tailwind for markets. Seasonality in financial markets refers to patterns or trends that occur at specific times of the year, influencing the performance of various assets or sectors. These patterns can be driven by a range of factors, including economic cycles, investor behavior and cultural events.

Historically, the fourth quarter has exhibited the best returns, on average. Consumers spend more on retail during the holiday season, the “Santa Claus” rally (where stocks tend to rise in the last week of December), and general optimism moving into the new year tend to benefit the calendar period.

What’s more, when the first three quarters of the year post a positive return (like they did this year), the S&P 500 returns nearly 6% on average into year end.

But how much should we rely on the averages this year? We think three global events have the potential to affect fourth quarter asset returns.

1. Geopolitical tensions have escalated. Unfortunately, today global armed conflict stands at an 80-year high. This week was a reminder of that with the one-year anniversary of the October 7 terrorist attack on Israel by Hamas. Since then, geopolitical tensions have escalated further. Despite calls for restraint from global leaders, Israel is preparing for significant retaliation, potentially targeting Iran’s oil production and nuclear sites.

What we think: When geopolitical risks are elevated, it is important to distinguish between human risks and more nuanced investment implications. Seasonally, oil tends to have a negative price return in the fourth quarter due to less demand, refinery maintenance, year-end inventory adjustments and other factors. However, since the start of the quarter, which aligns with increasing conflict in the region, oil prices have increased over 6%. Gold, which tends to produce positive returns in the fourth quarter, can therefore act as a safe-haven asset. The precious metal has been hovering less than 2% from its all-time high.

As risks of a broader war in the Middle East continue to simmer, we think both oil and gold could hedge portfolios against geopolitical risk.

Regardless of the seasonality, equity markets have historically shown resilience through geopolitical crises. As such, tactical allocations may benefit returns but maintaining a diversified, goals-aligned portfolio has proven effective.

2. Chinese policy stimulus. Chinese equities also tend to get a fourth quarter seasonality boost. Since 1964, the fourth quarter has been the best performing quarter for the Hang Seng Index, returning +6.1% on average.

The past month has been filled with stimulus packages and policy adjustments in China. From the initial round of stimulus announcements on September 24 to its recent peak, offshore equities returned over 20%, while the onshore index rallied over 26%. The initial rally, which took place over the last two weeks, was driven by a comprehensive combination of policies (mostly monetary and equity market stimulus) and expectations for more (particularly on the fiscal side). But the mood has dampened in recent sessions as markets were disappointed by the lack of further major initiatives.

What’s next? The Ministry of Finance will host a press conference at 10am local time this Saturday focused on ‘greater use of fiscal policy to support economic growth’, which could be the announcement that markets are waiting for to decide if there are more fundamental legs to this rally.

Our take: We see the recent correction as a healthy adjustment after the market rally over the past week. Nonetheless, if further policy support exceeds market expectations of two to four trillion renminbi (RMB) supplementary bond issuance, it could lead to another rally in onshore and offshore equities and commodities (China accounted for 57% of world copper consumption in 2023).

3. The U.S. election. Election years tend to throw a wrench into typical U.S. equity seasonality. While non-election years have returned 3.5% in the fourth quarter on average since 1930, that drops to 1.7% in election years. However, even in election years, the fourth quarter is still the second-best performing quarter on average.

The other seasonal trend that tends to exist during election years involves volatility. The CBOE Volatility Index (VIX), a gauge of S&P 500 expected 30-day volatility, tends to be higher in election years with a peak in October. Volatility tends to fade following the election and the “Santa Claus” rally still visits markets regardless of whether it’s an election year or not. The last six weeks of the year in election and non-election years averaged +0.2% weekly returns, versus +0.1% for all other weeks.

What we think: We think the typical seasonality during election years will likely persist. Volatility could be elevated until a candidate is declared the winner. After that, markets could forecast policy implications with more certainty. But no matter who wins the election, we wouldn’t derail our investment plans. Since 1950, there have been 18 presidential elections and 10 transitions in the White House between Democrats and Republicans. Over those 74 years, U.S. GDP growth has averaged a 3.2% annual pace, while the S&P 500 has compounded at 9.4% per year.

While a seasonality analysis can be a useful endeavor for tactical positioning, we think portfolios and markets are best viewed over the long term. Corporate earnings growth drives equity markets higher, bonds can provide diversification and a hedge to slower growth, and well balanced portfolios remains crucial to achieving goals. As always reach out to your J.P. Morgan advisor for help achieving those goals.

All market and economic data as of 10/11/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Index definitions:

Oil: The ICE Brent Crude futures contract is a deliverable contract based on EFP delivery with an option to cash settle.

Gold: The Gold Spot price is quoted as US Dollars per Troy Ounce.  Gold Cross rates are available using XAU followed by 3-character ISO code of the cross currency.

The Hang Seng Index is a free-float capitalization-weighted index of a selection of companies from the Stock Exchange of Hong  Kong. The components of the index are divided into four subindices: Commerce and Industry, Finance, Utilities, and Properties.  The index was developed with a base level of 100 as of July 31, 1964. HSI does not have official ISIN registered.

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

RISK CONSIDERATIONS

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