Central banks get on the cutting edge

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October 8, 2024

6 MIN READ

Summary

Global equity markets gained ground during the third quarter amid periods of volatility. Emerging markets outperformed their developed-market counterparts. Stocks rallied amid investors’ optimism leading up to the Federal Reserve’s (Fed) interest-rate cut in mid-September, as well as previous rate reductions by several other major central banks.
Global fixed-income assets posted gains for the quarter. U.S. Treasury yields moved significantly lower across the curve, resulting in a positively sloped yield curve for the first time in more than two years. (Bond prices move inversely to yields.)
Given the near-term effects of early stimulus measures in the U.S. on an already healthy economy and the wide-ranging efforts from China to prompt a rebound, we see lower recession probabilities and a favorable environment for risk assets in the fourth quarter.

Global equity markets gained ground during the third quarter amid periods of volatility. Emerging markets outperformed their developed-market counterparts. Stocks rallied amid investors’ optimism leading up to the Fed’s interest-rate cut in mid-September, as well as previous rate reductions by several other major central banks. Stocks also benefited from generally favorable economic data and, late in the quarter, China’s announcement of new economic stimulus measures. The U.S. broad-market S&P 500 Index posted its best performance for the first nine months of a calendar year since 1997, raising its aggregate market capitalization above $50 trillion for the first time.¹

By an 11-1 margin, the Federal Open Market Committee (FOMC) voted to reduce the federal-funds rate by 50 basis points (0.50%) to a range of 4.75% to 5.00% following its meeting on September 17-18. Fed Governor Michelle Bowman favored a 25-basis-point cut. According to a statement announcing the rate decision, the FOMC “has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the [FOMC’s] goals.”

The Fed’s so-called dot plot of economic projections indicated a median federal-funds rate of 4.4% at the end of 2024, down from its previous estimate of 5.1% issued in June, signaling that the central bank anticipates additional federal-funds rate cuts totaling roughly 50 basis points by the end of this year. The central bank also projected that the benchmark rate will drop another 100 basis points to 3.4% by the end of 2025. The Fed estimated that core inflation, as measured by the core personal-consumption-expenditures (PCE) price index, will end the year at an annual rate of 2.6%—modestly lower than the central bank’s 2.8% forecast in March. The core personal-consumption-expenditures (PCE) price index is the Fed’s preferred measure of inflation as it excludes volatile energy and food prices.

The Pacific ex. Japan region was the strongest performer among developed markets for the third quarter, led by Hong Kong and Singapore. Conversely, in a reversal of a recent trend, the Nordic countries were the weakest performers due largely to Denmark, which declined during the quarter. Additionally, Norway recorded a relatively smaller positive return. The Association of Southeast Asian Nations (ASEAN) led the emerging markets for the quarter due mainly to strength in Thailand and the Philippines. Europe was the most notable laggard among emerging markets attributable primarily to weakness in Turkey and Poland.²

¹ According to Bloomberg. September 30, 2024.

² All equity market performance statements are based on the MSCI ACWI Index.

Read the full commentary

Glossary of financial terms

The federal-funds rate is the interest rate charged to lending institutions on unsecured overnight loans. It is set by the U.S. Federal Reserve’s Federal Open Market Committee. The rate is increased when the Federal Reserve wants to discourage borrowing and slow the economy and decreased when the Federal Reserve wants to spur economic growth.

Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value, or face value.

Yield curve represents differences in yields across a range of maturities of bonds of the same issuer or credit rating (are (which is used to assess the risk of default of companies or countries). A steeper yield curve represents a greater difference between the yields. A flatter curve indicates that short- and long-term yields are closer together.

An inverted yield curve occurs when short-term yields exceed long-term yields. While an inverted yield curve historically has predicted economic recessions, it is an indicator—not a forecast.

Monetary policy refers to decisions by central banks to influence the amount of money and credit in the economy by managing the level of benchmark interest rates and the purchase or sale of securities. Central banks typically make policy decisions based on their mandates to target specific levels or ranges for inflation and employment.

Index descriptions

All indexes are quoted in gross performance unless otherwise indicated.

The MSCI ACWI Index is a market capitalization-weighted index that tracks the performance of over 2,000 companies, and is representative of the market structure of 48 developed and emerging-market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars.

The personal-consumption-expenditures (PCE) price index measures the prices that consumers pay for goods and services to reveal underlying inflation trends. The core PCE price index, the primary inflation monitor used by the Federal Reserve, excludes volatile food and energy prices.

The Shanghai Shenzhen CSI 300 Index is a market capitalization-weighted index that tracks the performance of the largest companies on the Shanghai and Shenzhen stock markets.

The Bloomberg Global Aggregate Bond Index is a market capitalization-weighted index that tracks the performance of investment-grade (rated BBB- or higher by S&P Global Ratings/Fitch Ratings or Baa3 or higher by Moody’s Investors Service) fixed-income securities denominated in 13 currencies. The index reflects reinvestment of all distributions and changes in market prices.

The Bloomberg US High Yield Index tracks the performance of fixed-rate, publicly issued, non-investment-grade (rated BB+ or lower by S&P Global Ratings and Fitch Ratings or Ba1 or lower by Moody’s Investors Service) bonds.

The Bloomberg US Treasury Index tracks the performance of fixed-rate, nominal debt issued by the US Treasury.

The Bloomberg US Mortgage Backed Securities Index tracks the performance of fixed-rate agency mortgage-backed securities (MBS) guaranteed by the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Freddie Mac (FHLMC).

The Bloomberg US Corporate Investment Grade Index tracks the performance of the investment-grade, fixed-rate, taxable corporate bond market.

The Bloomberg Commodity Total Return Index comprises futures contracts and tracks the performance of a fully collateralized investment in the index. This combines the returns of the index with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury bills.

Consumer-price indexes measure changes in the price level of a weighted-average market basket of consumer goods and services purchased by households. A consumer price index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding SEI’s portfolios or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments.

Diversification may not protect against market risk. Past performance does not guarantee future results. Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).