Market Update

This 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.
• 78% of the companies in the S&P 500 notched positive total returns while the average constituent performed 1.7 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 has 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 like 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. gross domestic product (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 (Fed) 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. We think the data underscores our call for a soft landing and a gradual pace of Fed rate cuts from here.

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

Through market close on Thursday, the S&P 500 was down -1% during the week and Treasuries climbed with the 2-year Treasury up 15 basis points to 3.71% and the 10–year Treasury up 9 basis points to 3.85%.

Elsewhere, “safe-haven” assets linked closely to increased global tensions made moves. Gold rallied slightly +0.9% and oil spiked +8.5%. Investors also received the latest employment data. The bottom line? The labor market appears to be holding steady, if not more resilient than expected. 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 this week and what they may mean for your portfolio.

Geopolitical tensions have escalated

Conflict in the Middle East. Our job as investment strategists 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.

On 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 of 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 a massive missile attack, with potential targets including Iran’s oil production facilities and nuclear sites. In the meantime, the Israeli military launched an overnight 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 has spiked by about 8.5% so far this week while Gold has remained near all-time highs.

When it comes to oil, excess supply (the U.S. 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) and 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.

What should investors consider? When there’s uncertainty, the best thing to do is remember that staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises, wars, pandemics, supply chain interruptions, labor strikes and recessions alike – and will likely continue to do so.

That said, there are some tactical decisions that investors may consider to further insulate portfolios. That could include taking a look at investments with uncorrelated return streams, lower volatility or downside buffer capabilities (i.e. structured notes).

For example, the utilities sector has been historically less volatile relative to the broader S&P 500. To boot, we think it is well positioned today thanks to the AI-fueled modernization and expansion of the power grid. Additionally, as interest rates decline, utility stocks’ dividend yields (about 3%) may become even more appealing. Despite strong 2024 performance (+27% year-to-date), utilities are trading at a discount to the S&P 500 and are roughly in line with their historical valuation averages, further enhancing their attractiveness.

We are also believers in the long-term performance of companies in the security space (from traditional defense to cybersecurity) and today is no different. When it comes to commodities, gold may trend higher if uncertainty remains and while we believe supply dynamics should balance oil price action, further escalation could push prices higher.

We will continue to monitor possible drivers of volatility across the spectrum. That said, we remind investors that over the last eight decades, the fourth quarter has been the best for the S&P 500 with an average gain of 4.2% and gains 79% of the time.

Your J.P. Morgan advisor is here to help you navigate what may be on the road ahead.

All market and economic data as of 10/04/2024 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:

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 S&P 500 Equal Weighted 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 – or 0.2% of the index total at each quarterly rebalance.

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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