The final month of the third quarter, highlighted by a jumbo half-point interest rate cut, gave stock market investors something to cheer about. And hopes are good news will continue.
In September, the S&P 500 notched its fifth straight month of gains. That powered the average U.S. diversified stock fund to a monthly gain of 1.64%, a quarterly rise of 6.6% and a year-to-date return of 16.1%, according to Lipper Refinitiv data. S&P 500 index funds rose 2.1% in September, gained 5.77% for the quarter, and are up 21.68% year to date.
Good News For Stock Market
A trifecta of good news drove stocks higher in September, which historically is the worst-performing month for equities. The Fed's first rate cut since March 2020 and, pending easing cycle and a resilient U.S. economy boosted the bulls. And moves by China to stimulate its economy helped too.
"There's been quite a lot for the bulls to celebrate," said John Stoltzfus, chief investment strategist for Oppenheimer Asset Management.
Stoltzfus says there's a chance the S&P 500, which ended September at 5762.48, could overshoot his 5900 year-end price target. The S&P 500 notched five all-time highs in September, bringing its 2024 total to 43, according to S&P Dow Jones Indices.
"As long as the Fed manages to avoid a recession, it looks like this rally could go on for a while," said Stoltzfus. With rates heading lower, Stoltzfus says he likes rate-sensitive sectors. That includes industrials benefiting from China stimulus, financials and utilities because their dividends will look more attractive.
Worries In October
And there are plenty of things to worry about. Investors must navigate uncertainty around the November presidential election. The widening conflict in the Middle East involving U.S. ally Israel also poses risks. That raises the prospect of rising oil prices. And the port workers strike could halt shipments of key goods and food and cause a resurgence in inflation.
That said, the Fed slashing its key borrowing rate by half a percentage point to 4.75% to 5% to support the job market brought a risk-on tone back to Wall Street last month. The start of the rate-cutting cycle also provides a good setup for risk assets.
The Fed In Control
Looking back, it was the Fed's dovish pivot that moved markets. Aside from the S&P 500, the other three major U.S. stock indexes finished higher in both September and third quarter.
The Dow rose 1.85% last month, stretching its quarterly gain to 8.21% and annual rise to 12.31%. The Nasdaq composite posted the biggest gain in September, rising 2.68%. The tech-packed index, though, gained just 2.57% in the third quarter but is still up 21.17% in 2024. The small-cap Russell 2000 was the laggard in September, dipping 0.56%, but its 8.9% quarterly gain was tops among the major indexes. For the full-year, small caps are up 10.01%.
Risk Back In Style
The risk-on sentiment in September was evident in the types of mutual funds and exchange traded funds that shined the brightest. Growth equity funds led the rally, outpacing value funds, Lipper Refinitiv data shows. Large-cap growth funds rose 2.36% vs. a 1.18% gain for large-cap value. The 2.41% gain for midcap growth funds and 1.38% rise for small-cap growth also topped their value counterparts.
Sectors that benefit from falling rates, such as utilities and real estate, also performed well. Utility funds, which benefit from the need to power data centers, government pricing support and their role as a defensive investment option, posted a 5.94% gain last month.
Looking Beyond Tech
David Bahnsen, chief investment officer for The Bahnsen Group, a wealth-management firm that places an emphasis on dividend growth stocks, sees opportunities outside the Big Tech stocks that have been market leaders.
The firm recently added Morgan Stanley, an investment bank and wealth management firm committed to not only paying a dividend but growing it. His top utility pick is American Electric Power, which sports a 3.5% yield. It is also benefiting from the electricity demand needed to power data centers and build out AI.
So, what about tech overall? Science and technology funds rose 2.33% in September, but just 1.4% in the third quarter and were among the laggards, according to Lipper Refinitiv data.
Despite tech being less charged than utility stocks this year, the Magnificent Seven tech stocks continue to post solid returns.
Stock Market Gains Going Global
The big gainer in world equity funds in September was China Region funds, which surged 20.4%. That massively outperformed the average world equity funds' 2.57% gain. China stocks, which had been lagging, benefited from an economic stimulus jolt from the People's Bank of China.
Of the top-20 performing foreign stock ETFs in 2024, the top five performers in September were all China funds.
Bond investors also had another good month of gains in September. Fed rate cuts, despite being mostly priced in, pushed bond prices higher and yields lower.
The iShares Core US Aggregate Bond fund, which tracks a diversified basket of investment grade bonds, gained 1.34% to boost its quarterly gain to 5.21%. The core bond fund is up 4.56% in 2024, according to Lipper Refinitiv.
Figuring Out Bonds
Joseph Higgins, lead portfolio manager of Nuveen Core Bond Fund, a 2024 IBD Best Mutual Funds winner, says bonds are positioned well now that the "inflation genie is largely back in the bottle." Nuveen Core Bond Fund was previously known as TIAA-CREF Core Bond Fund, but underwent a name change in May.
Still, he says the bond market has priced in the good news from the Fed's recent jumbo rate cut. "There are no bargains in the fixed income market," said Higgins. But the key is that the Fed has kicked off its rate-easing cycle.
He doesn't recommend bond investors take too much risk, though. If inflation stays tame and the economy skirts recession, locking in current yields is a low-risk way to get yields of 4% to 5%. Cash yields, in contrast, will continue to move lower as the Fed cuts rates.
Is 5% Good Enough For Stock Market Investors?
Higgins says investors that hold cash must ask themselves: "Do I want to keep holding this 5% or 4.5% money market (that will drop further), or should I step out further in duration (and lock in higher yields for longer)?"
Campe Goodman, manager of Hartford Strategic Income Fund, also named an IBD 2024 Best Mutual Fund, recommends bond investors stick to intermediate bonds with maturities of around five years. It's a better alternative than holding cash. "Cash yields are like a melting ice cube," said Goodman.
