Risk assets delivered solid gains in September on the heels of stimulus measures in the U.S. and abroad. The Fed’s easing cycle commenced with a 50 bps cut during the month – and promises of another 50 bps reduction before year-end – and China unleashed “twin bazookas” of fiscal and monetary policy support. Both equities and fixed income delivered positive returns in this environment as did interest-rate-sensitive assets like real estate. Gold received a strong bid during the month, driving up price gains while a glut of energy put downward pressure on oil prices.
Stimulus Measures
The market eagerly anticipated the outcome of the Federal Open Market Committee (FOMC) policy meeting held on Sept 17-18th. In the days leading up to the meeting, Fed futures fluctuated, with traders flip-flopping between expectations of a 25 and 50 bps cut. Ultimately, the Fed delivered on market expectations by lowering the federal funds rate (FFR) 50 bps to a range of 4.50–5.00%; most economists in a Bloomberg poll expected a 25 bps cut.
The Summary of Economic Projections included a chart (See Page 2) that showed, compared to June, more participants see upside risks to labor markets, whereas the risks to GDP growth and core inflation remained steady in the “Broadly Balanced” category.
China initiated a broad round of new fiscal and monetary policy measures aimed at stimulating consumption and stabilizing the property market.
Following years of incremental support, the package was viewed as a signal of growing concern in Beijing and acknowledgement that the country is at risk of falling short of its 5% annual growth target.
Global Equities
The domestic equity markets continued their run, registering a fifth consecutive month of gains. Both the S&P 500 and the broader Russell 3000 Index advanced 2.1%. Large and mid caps outpaced small caps; the Russell 1000 Index returned 2.1% versus 0.7% for the Russell 2000 Index. Growth stocks outperformed their value counterparts, with the Russell 3000 Growth Index gaining 2.8% vs. 1.3% for Russell 3000 Value.
Consumer discretionary (+6.6%) was the best performing sector, aided by a rebound in auto maker Tesla (+22.2%). Utilities (+6.2%) followed closely behind. Year-to-date (YTD), interest-rate-sensitive utilities were the top sector (+30.2%). Energy (-2.8%) was the worst-performing sector for the second consecutive month amid lower oil prices; it was also the worst performing sector YTD (+7.4%).
Within emerging markets (EM) equities, China (+23.9%) was the big driver of returns. Following its stimulus measures, the CSI 300 Index, which represents the top 300 stocks traded on the Shanghai and Shenzhen exchanges, was up over 16% the following week, which marked its best week since the Global Financial Crisis in 2008.
Strength in China helped lift EMs as a whole (+6.7%) and outpace developed non-U.S. equities (+0.9%). Returns across the developed world were generally positive, the notable exception being Japan. Japan (−0.6%) was on track for recovery before the surprise election of Shigeru Ishiba as Prime Minister at month-end, and Ishiba’s decision to call a snap election, spooked markets.
Fixed Income
The 50 bps rate cut by the Fed sparked a sharp rally in rates and sent front-end yields lower, with the 3-month and 6-month yield declining 48 and 45 bps, respectively, month-over-month. Moving farther out the curve, the 2-year yield fell 28 bps while the 10-year yield fell 15 bps. These moves show that the curve underwent a bull steepening, with front-end yields falling by more than the decline in long-end yields and—perhaps most notably—the yield curve “uninverted” with the spread between 2- and 10-year Treasuries turning positive; the curve first inverted in July 2022.
The move lower in rates benefited domestic fixed income performance broadly, with longer duration fixed income securities generally outperforming their shorter duration counterparts. For the month, long Treasuries delivered a return of 2.0%, while 5- and 10-year Treasuries returned 1.3%, and 1-3 year Treasuries returned 0.8%, respectively.
On the credit front, investment-grade bonds performed notably well, leading with gains of 1.8%. High-yield bonds trailed modestly behind with a return of 1.6% and continued to experience spread compression to the tune of −10 bps. Unsurprisingly, leveraged loans were among the weakest performers across fixed income overall, returning just 0.6%.
Turning our attention globally, global bonds built on robust gains in August with another strong month of performance. The Bloomberg Global Aggregate Index delivered a return of 1.7% and surpassed the Bloomberg U.S. Aggregate Index for a second straight month, which saw a return of 1.3%. EM debt (unhedged local) though, emerged as the best-performing fixed-income sector overall, driven by dollar depreciation on the heels of the Fed’s outsized rate cut.
Real Assets
Real assets generally outperformed broader markets in September. Global real estate was up 3.0%, with European REITs (+5.4%) outperforming as the European Central Bank cut rates by an additional 60 bps. Global REITs have advanced 11.8% YTD. Global infrastructure (+3.8%) and clean energy (+2.9%) were boosted by rate cuts, and the expectations for more through 2025. These sectors have also benefited from AI’s growing demand for power, particularly from renewable sources. Microsoft made headlines by partnering with Constellation Energy to reopen a nuclear reactor on Three Mile Island. The reactor will help power the company’s AI-related data centers.
Gold (+5.7%) continued its climb on growing geopolitical uncertainty, strong central bank buying, and declining interest rates. Gold is up 27.8% YTD, leading all real asset categories and most major equity indices. Metals and mining equities jumped 9.8%, with most of the gains coming in the last week of the month after China announced new stimulus measures.
While most real asset sectors saw gains, Brent crude prices were down 6.8%, ultimately finishing the month below $72 per barrel, and down 6.9% YTD. The industry continues to grapple with an oversupplied market, with Saudi Arabia threating $50 dollar oil prices to regain market share if other OPEC+ producers continue to disregard agreed-upon production cuts. Diversified commodities returned 4.9% while natural resource equities declined 1.4% during the period. ⬛
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