Third Quarter 2024 Market Commentary
The major development in the third quarter was the Federal Reserve’s decision to cut interest rates by 0.50%, the first rate cut of this cycle. This occurred as the Fed shifted its focus, with unemployment rising to a 33-month high and inflation receding. In the equity market, stocks ended the quarter higher despite some volatility, including a brief but sharp sell-off in early August. The S&P 500 posted its fourth consecutive quarterly gain and ended September near an all-time high.
This commentary discusses the Fed’s first rate cut, examines the increase in market volatility, recaps third quarter market performance, and looks ahead to the final quarter of 2024.
The Federal Reserve Cuts Interest Rates
During the third quarter, the Fed began the process of normalizing interest rates after a volatile five years.
To recap, the Fed cut interest rates a total of 1.5% to near-zero during the COVID pandemic to support the economy. It kept rates near 0% until March 2022, when it began raising interest rates in response to soaring inflation. From March 2022 to July 2023, the central bank raised rates by 5.25%, one of the largest and fastest rate-hiking cycles in decades.
The Fed held interest rates steady for over a year as it waited for inflation to return to its 2% target, and after 14 months, it started the rate-cutting cycle with a 0.50% reduction at its September meeting.
The Fed’s transition to cutting interest rates comes as its focus shifts from lowering inflation to supporting the labor market. Since the last rate hike in July 2023, annual inflation has dropped from 3.3% to 2.6%.
However, over the same period, unemployment has risen from 3.5% to 4.2%, the highest level since October 2021. The Fed appears confident that inflation will return to its 2% target but has expressed concerns about the health of the U.S. labor market.
The Fed and investors are trying to understand the reasons behind, and impact of, the labor market softening over the past year. This could be the labor market simply normalizing after experiencing significant disruption during the pandemic.
However, it may also be an early sign of weakening labor demand. This uncertainty is one reason the Fed moved to cut interest rates.
Investors expect the Fed to cut interest rates at its two remaining meetings this year, with further reductions expected throughout 2025. The market expects an additional 0.50% rate cuts by the end of this year, followed by another 1.50% by the end of 2025.
Investors are betting that the combination of falling inflation and rising unemployment will cause the Fed to implement these significant rate cuts. However, the actual timing and amount of rate cuts will depend on the economy’s path.
A weaker economy will justify more rate cuts, while a stronger economy will require fewer rate cuts.
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*Source: Standard & Poor’s and WhiteHouse.gov
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
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