Over the third quarter major market segments within global equities and fixed income delivered positive results. The markets’ strong quarterly returns coincided with the Federal Reserve’s (Fed) 50-basis point rate cut and marked a turning of the tide for monetary policy. The easing monetary environment and expectations of further loosening ahead provided a buoy for equity and fixed income securities, in the face of ongoing geopolitical tensions and fluctuating economic signals around the U.S. labor market and inflation. Additionally, China stimulated its economy, further helping international equities, in particular emerging market equities.
Domestic equity markets, represented by the Russell 3000 Index, returned 6.23% over the third quarter, while international equity markets posted stronger results, with the MSCI ACWI Ex USA Index returning 8.06%, and the MSCI EM Index up 8.72%. Fixed income indexes generated strong performance as well, with domestic fixed income securities, represented by the Bloomberg US Aggregate Bond Index, returning 5.20%, underperforming the Bloomberg Global Aggregate Bond Ex USD Index, representing global fixed income, which returned 8.52%.
| Asset Class Returns* | Q3 2024 Returns | YTD Returns | Trailing 12 Months |
|---|---|---|---|
| Equities | |||
| Large Cap Growth | 3.19% | 24.55% | 42.19% |
| Large Cap Value | 9.43% | 16.68% | 27.76% |
| Mid Cap Growth | 6.54% | 12.91% | 29.33% |
| Mid Cap Value | 10.08% | 15.08% | 29.01% |
| Small Cap Growth | 8.41% | 13.22% | 27.66% |
| Small Cap Value | 10.15% | 9.22% | 25.88% |
| Int'l Developed Markets | 7.33% | 13.50% | 25.38% |
| Emerging Markets | 8.72% | 16.86% | 26.05% |
| Commodities | 0.68% | 5.86% | 0.96% |
| REITs | 15.56% | 14.92% | 33.71% |
| Fixed Income | |||
| Intermediate-Term Bonds | 4.17% | 4.68% | 9.45% |
| Short-Term Bonds | 2.96% | 4.38% | 7.19% |
| High Yield | 5.28% | 8.00% | 15.74% |
| TIPS | 4.12% | 4.85% | 9.79% |
| Int'l Bonds | 8.52% | 2.81% | 12.28% |
| Emerging Market Bonds | 6.07% | 8.02% | 18.02% |
| Bank Loans | 2.04% | 6.54% | 9.59% |
| Liquid Alternatives | |||
| Global Hedge Funds | 2.12% | 5.08% | 6.86% |
* Data from Morningstar. Asset classes represented by (in order of table): Russell 1000 Growth TR USD, Russell 1000 Value TR USD, Russell Mid Cap Growth TR USD, Russell Mid Cap Value TR USD, Russell 2000 Growth TR USD, Russell 2000 Value TR USD, MSCI EAFE NR USD, MSCI EM NR USD, Bloomberg Commodity TR USD, DJ US Select REIT TR USD, Bloomberg US Govt/Credit Interm TR USD, Bloomberg US Govt/Credit 1-3 Yr TR USD, Bloomberg US Corporate High Yield TR USD, Bloomberg US Treasury US TIPS TR USD, Bloomberg Gbl Aggregate Ex US TR USD, JPM EMBI Global TR USD, Morningstar LSTA US LL TR USD.
Value outperformed growth
While the loosening monetary policy clearly benefited markets, some asset classes benefited more than others. This is particularly the case when looking at the shift from growth to value stocks, where the Russell 1000 Value Index outperformed its growth counterpart by 624 basis points last quarter, the only quarterly period of outperformance out of the last seven quarters, with Q4 2022 being the previous quarter that value beat growth.
Diversification benefited investors over the third quarter with several diversifying asset classes adding value, as a simple portfolio invested 60% in the S&P 500 Index (up 5.89%) and 40% in the Bloomberg US Aggregate Bond Index (up 5.20%) underperformed a more diversified portfolio. More specifically, small caps (up 9.27%) international developed equity (up 8.06%) emerging markets (up 8.72%), REITs (up 15.56%), high yield debt (up 5.28%), and international fixed income (up 8.52%) were all constructive to relative performance in the third quarter.
Diversification helps address complexity
The quarter was a good case study for the benefit of diversification, in a period where both bonds and stocks generated strong returns, diversifying asset classes provided additional value add to the overall portfolio return. Furthermore, diversified portfolios have proven beneficial during periods with major events that lead to differentiated performance across asset classes. In such environments, the allocation to a variety of assets classes whose returns are less than perfectly correlated can result in a portfolio with superior risk adjust performance.
While the inclusion of diversifying asset classes may not produce the greatest absolute performance every quarter, we remain confident in a diversified investment approach, one rooted in the allocation to proven diversifiers. History has shown that implementing such an investment approach, with a long-term outlook, can shelter a portfolio from the extreme swings of the market and give investors the most stable path toward their financial objectives.
By: Scott Keller, Portfolio Manager
