Market Commentary
- All eyes were on the Federal Reserve this quarter. While the Fed held steady at the July meeting, it initiated a rate-cutting cycle with a 50 basis points cut at its September meeting. The inflation backdrop has continued to progress toward the Fed’s target (U.S. CPI was 2.4% in September) and the labor market has started to show signs of cooling. The duration and extent of future cuts remain uncertain.
- The U.S. economy remains resilient growing 3% in the second quarter. Despite a cooling in the labor market (the U.S. unemployment rate remains above 4%), the consumer remains relatively healthy and corporate fundamentals are positive. However, rising delinquencies, the dock worker strike, potential tariffs, and other uncertainties may weigh on future growth.
- Market volatility is expected to remain high leading up to the presidential election. Long-term investors who stay invested regardless of political party tend to be rewarded.
Fixed Income
- Rates fell during the third quarter and fixed income markets saw favorable results overall. The U.S yield curve steepened as the Fed cut rates, with the spread between the 2-year and 10-year U.S. Treasury yields turning positive; the first time since 2022. The Bloomberg Agg returned 5.2% during the third quarter. Yields remain attractive but are lower than a year ago due to spread compression and lower rates.
- The corporate credit market remains resilient as well and also had a strong quarter. The Bloomberg U.S. High Yield Index gained 5.3% in the third quarter. Growing investor expectations for the prospect of a soft-landing scenario helped drive performance. Corporate bond valuations remain elevated with tighter spreads, supported by favorable fundamentals and optimism around a soft-landing scenario.
Equity
- Equity markets were strong across regions during the quarter. The Mag 7 took a bit of a breather during the quarter. Areas less exposed to these concentrated names and more sensitive to lower interest rates outperformed. U.S. small-cap led the way, with the Rusell 2000 Index gaining 9.3%, while the large-cap oriented S&P 500 returned 5.9%.
- International markets were also positive, with developing regions (MSCI EM) outpacing developed (MSCI EAFE), returning 8.7% and 7.3%, respectively. Investor optimism surrounding the recent stimulus package in China helped fuel strong performance for the region and easing central bank activity in Europe helped propel those markets.
Real Assets
- REITS had a standout quarter, with the FTSE Nareit Equity REITs Index returning 16.1%. The falling interest rate environment was beneficial to this rate sensitive area of the market. Longer lease assets benefited the most and the office sub-sector had a strong rebound from depressed levels earlier in the year.
- Commodities saw a modest gain in the quarter (+0.7%), with the precious metals sub-component leading, driven by higher gold prices. Energy segments detracted as concerns about a slowing global economy and OPEC+ adding to supply negatively impacted oil prices.
This report is intended for the exclusive use of clients or prospective clients (the “recipient”) of HCR Wealth Advisors and the information contained herein is confidential and the dissemination or distribution to any other person without the prior approval of HCR Wealth Advisors is strictly prohibited. Information has been obtained from sources believed to be reliable, though not independently verified. Any forecasts are hypothetical and represent future expectations and not actual return volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. The opinions and analysis expressed herein are based on HCR Wealth Advisor research and professional experience and are expressed as of the date of this report. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is risk of loss.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees or expenses.
Bloomberg Aggregate Bond Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg US Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
S&P 500 Index is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 Index consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
FTSE Nareit Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Material Risks Disclosures
Fixed Income securities are subject to interest rate risks, the risk of default and liquidity risk. U.S. investors exposed to non-U.S. fixed income may also be subject to currency risk and fluctuations.
Domestic Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry factors, or other macro events. These may happen quickly and unpredictably.
International Equity can be volatile. The rise or fall in prices take place for a number of reasons including, but not limited to changes to underlying company conditions, sector or industry impacts, or other macro events. These may happen quickly and unpredictably. International equity allocations may also be impact by currency and/or country specific risks which may result in lower liquidity in some markets.
Real Assets can be volatile and may include asset segments that may have greater volatility than investment in traditional equity securities. Such volatility could be influenced by a myriad of factors including, but not limited to overall market volatility, changes in interest rates, political and regulatory developments, or other exogenous events like weather or natural disaster.
