MARKETS REMAIN GUARDEDLY RISK-ON IN ELECTION RUN-UP
Oct 9, 2024
In its 4Q 2024 Outlook, PGIM Quantitative Solutions sees a moderate growth outlook with elevated volatility heading into the U.S. presidential election. Read on to view their full outlook for the quarter ahead.
RESILIENT MARKET DESPITE NEAR-TERM VOLATILITY
The third quarter saw a continuation of the risk-on theme evident in markets for much of this year. In the first half of July, the S&P 500 Index hit a succession of record highs, while bonds rallied on increased speculation that the Fed would cut rates in September. But risk assets fell sharply in mid-July, and the Magnificent Seven posted significant losses that left the index down over -10% from peak to trough. Commodity prices also saw notable declines, particularly among energy and industrial metals. Intense volatility continued in early August, triggered by a weak U.S. jobs report. However, markets stabilised later in the quarter, supported by reassuring macro data and Fed Chair Powell’s dovish message at Jackson Hole.
Year to date, many asset classes and segments have posted solid gains. Risk assets continue their strong advance, driven by U.S. large-cap growth stocks that are benefiting from robust demand. Interestingly, gold-which typically performs well during periods of high-risk aversion and inflation worries-has also posted strong gains. Meanwhile, the U.S. Aggregate Bond Index had a rough first half as inflation worries resurfaced, but has since stabilised and notched modest gains as inflation began to moderate and rate cuts came into focus. As much as the first half of 2024 was marked by low volatility and strong gains in risk assets, the sudden flare-up in risk aversion in July and August set the stage for continued market volatility in the near term, until at least the U.S. election is over.
SUPPORTIVE BACKDROP FOR FIXED INCOME
For fixed income, the steady moderation in economic growth, along with rising confidence that core inflation is easing, has resulted in a sharp drop in the 10-year Treasury yield over Q3, to around 3.6%. Rates volatility is likely to persist as markets continue to evaluate the extent of rate cuts, especially given the sustained strength of the economy. The environment of moderate growth and inflation along with expected rate cuts will likely be supportive of credit spreads remaining around their current tighter-than-average levels.
EARNINGS GROWTH MAY CONTINUE TO BROADEN
U.S. earnings growth is expected to improve over the next four quarters, with slower large-cap tech earnings offset by an improvement in earnings growth for the rest of the market. However, lower-risk assets and fixed income securities are likely to benefit if growth falls faster. On the other hand, if falling inflation and solid growth drive lower interest rates, both risky and more conservative assets stand to benefit. Commodities have recently lagged as risk aversion increased amid prospects of slower global growth. This dynamic is likely to persist in Q4 with growth continuing to slow, particularly in China.
ELECTION YEARS HISTORICALLY FAVOUR BONDS
On average, equity markets have posted moderate gains during election years, although lower than historical annual averages. It can be difficult to isolate the effect of elections on equity market performance due to diverse macro and policy environments over the many election years. The increased volatility during election years has made stocks move up gradually for most of the year, usually followed by a relief rally in the final two months as the uncertainty lifts. Among equity factors, quality and low-risk factors perform relatively better. While value has done well during election years, its best performance is usually during the initial part of the presidential cycle. Growth factors typically do well later in the cycle. Momentum factors, such as those based on price and earnings, also perform well mid- to late-cycle.
Meanwhile, fixed income assets outperform stocks on average during election years. Historically, the Fed tends to set policy a little looser during election years, putting downward pressure on interest rates. Combined with increased volatility in risk assets, the environment for fixed income is relatively more favourable.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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