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We are now two months through the worst seasonal time of the year for markets, and things have been remarkably positive. Outside of a quick drop in equities and a spike in volatility to begin August, the last two months have been great for investors. The “everything rally” we have talked about marches on with the S&P 500 on track for its best year since the 1990s, which is even more remarkable considering how strongly it performed last year.
Markets are well known to “climb a wall of worry” and have done that very well this year. We entered the year on the lookout for a recession and slowdown in earnings growth, yet those fears have diminished, and markets have now embraced the thoughts of an economic “soft landing” in the U.S.
Furthering the positive sentiment, global central banks have embarked on a coordinated easing cycle. The US Federal Reserve’s rate-setting Federal Open Market Committee is the latest to join the party with a somewhat surprising 50 basis point (bp) rate cut this month. Every other time the U.S. central bank kicked off a rate-cutting cycle with a 50bp move, it was during some sort of crisis or market shock. Yet the message this time is that everything is great; it’s just an acknowledgement that it’s time to normalize rates.
The final piece of good news that dropped this month was China launching its long-awaited stimulus programs. The post-Covid experience in China has been much more muted than in other parts of the world, and investors have been looking forward to stimulus for a while. It has finally happened, and the commodities and other growth parts of the market have reacted positively.
So what do you get when you have a soft landing, rate cuts, and stimulus? You get a bull market. With that backdrop and plenty of cash on the sidelines, those who have stayed invested and ignored the scary headlines in the media have done very well.
The only real question left is, “Have we priced in all the good news?” It’s a valid question. When things seem too easy, they seldom last long. We continue to expect some volatility to pop up in financial markets. U.S. corporate earnings season will kick off shortly and shine some light on consumer health. We have already seen examples of disappointments being punished, which adds to the risk around the reporting date.
The U.S. election remains a toss-up and too close to call. The only positive is that (hopefully) by mid-November, we can move on to talking about something else. This event risk may cause markets to tread water until it passes, which will allow many to digest the strength of returns we have seen so far this year.
One very positive development over the quarter has been the broadening out of the rally. Everyone knows the first part of this year was dominated by large technology companies and AI hype. That mania faded over the last few months. We have seen strong returns come back to forgotten parts of the market, such as financials, REITs, and dividend payers. A broad-based rally is undoubtedly a positive.
Heading into the final quarter of what has been a very positive year, investors have the right to be content with themselves. But complacency can be dangerous, too. With the backdrop so positive, it is curious to see traditional safe-haven assets such as gold at record highs. Maybe it’s telling us something we should be paying attention to. Or has gold just joined the “everything rally?” Regardless, it has been a good year, and once we get past the uncertainty of the U.S. election, markets should continue to march higher. Just don’t forget October has a tendency to keep things interesting.
Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments Inc.
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