The third quarter of 2024 was more volatile than the first half of the year, as investors tried to make sense of conflicting economic data, central bank messaging and the deteriorating situation in the Middle East.
Japan was the only major equity region to fail to provide a positive return over the quarter, as the Yen carry trade unwound dramatically leading the Japanese stock market to fall over 12% in a single day – its worst one day fall since Black Monday in 1987. We have written before about the markets tendency to overreact on both the downside as well as the upside, and so it proved once again as the index recovered to a small loss over the quarter as a whole.
Emerging Market equities posted the strongest gain over the quarter, largely fueled by a late quarter rally driven by stimulus measures announced in China. The wider Asia region closely followed also benefitting from similar tailwinds.
In the US the S&P 500 continued to advance, returning another strong gain of 6% as the Federal Reserve cut interest rates by 0.5% and the increasing belief a soft landing can be achieved. What was notable was the drivers of this return shifted somewhat, with much of the return provided by value and small cap stocks. Companies such as Nvidia, Microsoft and Alphabet that had provided much of the return in the first half of year fell in value (c2%, c4% and c9% respectively), as concerns rose about the valuations of not just these companies but the wider tech sector.
The UK market recorded a small gain over the quarter despite much anticipation of tax rises ahead of the Autumn budget. As we wrote in our last blog, markets tend to not really care about who is governing. The budget is likely to have a greater effect on you and your personal taxation than it will on your investment portfolio, and we have written to all our clients separately on this issue.
Bonds generally had a good quarter as yields fell and values rose on the back of central bank interest rate cuts and expectation for more to follow before the end of the year. This has been good news for not only bond holders but also mortgage holders, as rates have once again fallen below 4% for the most competitive deals on the market.
Q3 encapsulated much of what it means to be an investor in the stock market. The market will fluctuate, stocks will rise and fall on a daily basis (though they are slightly more likely to rise) and sometimes they can fall dramatically in a few hours and days, as happened to Japan and to a lesser extent the wider global market. The trade off for accepting this increased volatility has historically been increased returns, as opposed to holding less volatile assets such as cash. As we have written before, most investors are not good at handling this volatility and they end up taking all the volatility with little reward, they will chase returns when markets are at highs and sell when markets fall. They will try and predict whether value stocks will do better than growth stocks, large caps will do better than small caps or the UK will do better than the US. Most of the time, they will get these calls wrong.
We don’t like (or try) to make predictions as history has proven nobody can predict the market. The only thing we do know is the stock market changes all the time – in 2009 energy stocks accounted for 10% of global equity market value, now they are closer to 4%. Technology stocks have outperformed since then despite suffering the dot com bubble nearly a decade earlier. Instead of trying to predict any of this we believe the best strategy for the majority of clients is to buy and hold a low cost well diversified investment portfolio to prepare for what the market might do next and spend your time worrying about things you can control.