Mana’s Q3 2024 Market & Economic Update

Asset Class Performance

Global stock markets continued to rally into Q3 2024. The S&P 500 is the top performing market, up 21.2% YTD, supported by improving economic data and a 0.5% interest rate cut by the Federal Reserve in September. Emerging markets performed well, with Chinese equities gaining 16.4% YTD, boosted by a large stimulus package from Beijing in Q3. On the other hand, U.S. technology stocks, particularly in the Nasdaq 100, struggled, declining 4.3% this quarter as investors shifted away from high-growth sectors towards more defensive, income-producing areas. As the Fed cut rates in September, interest rate sensitive sectors rallied. In Q3 2024, US utility stocks rose by 19% and US real estate stocks by 17%. Bonds have remained steady, with returns primarily driven by yields, as much of the Fed interest rate cuts have been incorporated into current pricing. The Bloomberg Barclays US Aggregate Index is up 4.4% YTD.

Extensive research has shown that, if you have a diversified portfolio, a whopping 88% of your experience (the volatility you encounter and the returns you earn) can be traced back to your asset allocation. - Vanguard.

Investment Commentary + Outlook

Stock breadth in the US

The equity markets have experienced significant rallies throughout 2023 and 2024. The S&P 500 has been a standout performer, up over 20% year-to-date. Utilities and telecommunications sectors have shown robust gains, likely benefiting from their sensitivity to interest rates as rates have declined. Financials have performed well, bolstered by strong bank earnings that reflect the sector's resilience and profitability. In contrast, sectors such as energy, materials, consumer discretionary, and consumer staples have lagged behind. These sectors have not kept pace with the broader market rally, indicating a divergence in performance across different areas of the economy.

From a factor investing perspective, momentum has been the strongest performer, followed by growth and quality factors. This suggests that stocks with strong recent performance, high growth prospects, and solid financial health have been favored by investors. On the other hand, value, low volatility, and dividend factors have been the weakest performers. Stocks characterized by lower valuations, less price volatility, and higher dividend yields have underperformed relative to the market.

As we reflect on the market performance, one notable development this year is the increased breadth of the market rally. The market performance has shown more inclusivity, with a wider range of sectors and factors contributing to gains. This is a shift from the past couple of years, which were more dominated by growth and technology stocks. The minimum factor return, represented by dividend stocks, is up 15.5%, indicating a healthy, broad-based rally and reflecting stronger overall market participation.

This consistent growth does mean that valuations are at high levels. High valuations are no indicator for market declines, however, it’s reasonable to be cautious. While we don’t expect markets to continue rallying as significantly as they have, AI and automation may help to offset valuation pressures. Companies effectively leveraging new technologies can enhance their productivity and profitability, supporting continued earnings growth even in a high-valuation environment. This dynamic provides a foundation for equity markets to deliver reasonable returns despite initial valuation challenges.

China stimulus

In recent months, China has taken significant steps to bolster its slowing economy and stabilize financial markets through a series of stimulus measures. Recognizing challenges such as the downturn in the property sector, weakening global demand, and the lingering effects of the pandemic, the Chinese government and the People's Bank of China have implemented policies aimed at supporting growth. These initiatives include reducing key interest rates to lower borrowing costs, easing restrictions on home purchases to stabilize the real estate market, and accelerating infrastructure spending on projects that enhance long-term growth potential, such as renewable energy and technology innovation.

Source: T. Rowe Price Asset Allocation Viewpoints October 2024. Past performance is not a reliable indicator of future performance.

Data from MSCI. Emerging Markets ex-China and China are represented by the MSCI Emerging Markets ex-China Index and MSCI China Index, respectively. 

Data from Bloomberg Finance L.P.

The Chinese stock market's response to the stimulus has been strong: the Chinese equity market is up nearly 30% since the announcement of the stimulus.

Looking ahead, China's economy faces headwinds from both domestic and international fronts. While the stimulus measures provide support, structural challenges such as high debt levels and demographic shifts may limit the pace of recovery. The government's continued commitment to pro-growth policies indicates a willingness to take necessary steps to stabilize the economy, with a focus on sustainable growth areas like green energy and advanced technology that align with long-term strategic goals. For investors, China's stimulus efforts may present opportunities in specific sectors poised to benefit from policy support. However, careful analysis and selective positioning are crucial given the ongoing uncertainties. Potential risks include further slowdowns in economic activity, an escalation of property market issues, and external factors such as global trade tensions. These considerations underscore the importance of diversification and active management in emerging market investments.

Alternative Investments

For investors with the ability to take on illiquidity, or additional risk, alternative investments can be a consideration for enhancing diversification or returns in their portfolio. While these assets offer unique opportunities, they also require a deeper understanding and a long-term commitment. Below, we break down the core types of alternatives and their potential benefits. 

Private Equity

Private equity allows investors to access businesses that aren’t publicly traded, typically through venture capital, buyouts, or growth capital. These investments aim to improve a company’s value over time before realizing gains through an eventual sale. The return potential can be significant, but private equity investments are generally illiquid, with capital often tied up for years. Investors must also navigate the "J-curve," where early returns are negative before the portfolio matures.

Institutional investors, such as pension funds, have long allocated capital to private equity due to its ability to deliver excess returns compared to public markets - as is witnessed by the BlackRock chart pictured. For individual investors, the landscape is shifting, allowing more access to private equity opportunities. However, this asset class requires a deep understanding of the risks involved, particularly the importance of selecting the right manager and diversifying across industries and vintages.

Private Credit

Private credit involves lending to companies outside of traditional banking channels. Direct lending, mezzanine financing, and distressed debt are common forms of private credit, offering steady income and relatively lower volatility compared to equities. As banks reduce their lending activities, private credit has emerged as a valuable asset class for those seeking consistent returns.

While private credit is attractive for its income-generating potential, it is not without risks. Credit defaults and the illiquidity of these investments are important factors to consider. Investors should ensure proper diversification across sectors to mitigate risks and take advantage of opportunities presented by non-bank financing in today’s market.

Real Assets

Investing in real assets—such as real estate, infrastructure, or natural resources—provides a tangible hedge against inflation while generating income. Real estate investments, for instance, can offer both rental income and capital appreciation. Similarly, infrastructure investments, such as energy and transportation projects, provide long-term, stable returns.

Real estate has gone through significant challenges through the COVID crisis; higher interest rates and vacancies drove prices down. Today, this presents greater opportunities for investment. JP Morgan estimates long term return assumptions for US real estate to be 8.1% for core real estate and 10.1% for value added, increasing from 7.5% and 9.7% last year. It is important to note that real estate can significantly vary by sector and geography. Note, these are estimates and actual performance can vary. 

Real assets tend to have a low correlation with traditional markets, making them a strong addition to a diversified portfolio. However, these investments often require significant upfront capital and have long holding periods. Careful consideration of asset-specific risks, such as commodity price fluctuations or regulatory changes, is essential for success.

Hedge Funds

Hedge funds utilize a variety of strategies, including long/short equity, global macro, and event-driven investing, to deliver returns that are often uncorrelated with broader market performance. The flexibility of hedge funds makes them an attractive option for those looking to hedge against market volatility and pursue opportunities in both up and down markets.

Despite their appeal, hedge funds come with higher fees and a significant reliance on the fund manager’s expertise. Due diligence is critical when selecting a hedge fund, as the performance dispersion can be wide. Investors should carefully evaluate the manager’s track record, strategy, and the associated risks before committing capital.

Wrapping it up

As we reflect on the ebbs and flows of economic cycles, it's worth remembering that periods of doubt have often led to unexpected triumphs. In the early 90s, experts predicted a future of stagnation for the U.S. economy as it seemingly lost ground to Japan and Europe. Instead, America experienced a boom that propelled it to new heights, proving time and again its ability to adapt, innovate, and rebound from setbacks. As we navigate the ever-changing landscape of global markets, it's clear that predicting the future with certainty is impossible. Recent rallies and shifts in various sectors underscore the importance of staying adaptable yet disciplined. While we can't foresee every market movement, we can control our approach to investing.

Maintaining a well-diversified portfolio and staying invested across global markets remain key strategies for managing risk and seeking growth. By sticking to your long-term financial plan, you position yourself to weather short-term volatility and benefit from opportunities that arise in different regions and sectors.

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Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.