Notably, there were signs of rotation away from the performance dynamics that had dominated the first half of the year, as value outperformed growth, small outperformed large, and non-US outperformed the US. The S&P 500 Index returned 5.9% for the period, while the MSCI World Index gained 6.4%.¹

Under the Influence

One market idiosyncrasy investors have been forced to contend with for much of 2024 has been the presence of two distinct gravity wells of influence. One is the Goldilocks scenario in the US, as cooling inflation, a softer labor market, continued economic growth and strong corporate earnings have converged to raise hopes that a soft landing may yet be realized. Risk appetites in the US have remained elevated, supporting equity markets and credit spreads. The other is the continued weakness in China, where both structural and cyclical issues have weighed the country’s manufacturing base as well as global assets dependent on it, including a range of industrial commodities like copper and oil. Risk appetites in China are depressed and have also weighed down other countries in the region.

More recently, however, signs have emerged that the strength of this duality may be waning. In mid-September, the Federal Reserve kicked off its much-anticipated rate-cut cycle, announcing the first federal funds rate reduction since the early-2020 onset of Covid-19. The oversized 50 basis point cut was broadly in line with market expectations and brought the central bank’s key policy rate to a range of 4.75–5.00%. Fed Chair Powell characterized the move as a “recalibration” of policy that reflected the committee’s growing confidence labor-market strength could be preserved amid healthy economic growth and further cooling in inflation. The latest summary of economic projections suggest an additional 50 bps of cuts in 2024 and 100 bps in 2025.²

Data released subsequent to the Fed meeting appeared to back up the central bank’s confidence in the jobs market’s resilience. Unflagging labor strength runs the risk of sparking inflationary pressures anew, however, a risk of particular concern given that wage growth, while well off its peak, remains above levels consistent with the Fed’s 2% inflation target. A Fed shift back to a hawkish policy bias sooner than expected could bring a recalibration of investor risk appetites and herald an untimely end to the US Goldilocks tale. In China, meanwhile, policymakers were finally spurred to action in late September, as the latest slew of uniformly downbeat releases— from retail sales and consumer confidence to industrial production and fixed investment—appeared to disabuse them of any notions that they would be able to reach their full-year economic growth target organically. The government announced a series of stimulus measures to combat mounting deflationary pressures, stabilize housing and restore market optimism. On the monetary side, the People’s Bank of China (PBOC) cut the reserve requirement ratio for banks and its benchmark short-term reverse repo rate, while instructing commercial banks to trim rates on outstanding mortgages and introducing new liquidity mechanisms to support capital markets.³ While officials had suggested that significant fiscal stimulus also was on tap, further details have yet to be announced.

News of the stimulus package was greeted enthusiastically by markets. The MSCI China Index, which began the third quarter down more than 50% from its early-2021 peak, surged 23.6% during September, with most of the gains coming in the last week of the quarter.⁴ Similarly, yields on 10-year government bonds rose off of all-time lows, green shoots of relief for policymakers concerned about the financial risks of such low yields. The potential for improved activity in China also prompted a positive inflection in expectations for real economic activity globally, helping push the prices of certain real assets higher.

Though we’re still waiting on details, the contours of a fiscal complement may be integral to the success of the PBOC’s monetary blitz; while China has long sought to boost domestic consumption, household spending remains less than 40% of GDP compared to 68% in the US.⁵ Further, it seems likely to us that China’s deeper economic challenges likely will persist without measures targeting the oversupply of real estate in lower-tier cities and the bad debts related to it, as well as local governments’ heavy reliance on the property market.

Though we’re still waiting on details, the contours of a fiscal complement may be integral to the success of the PBOC’s monetary blitz; while China has long sought to boost domestic consumption, household spending remains less than 40% of GDP compared to 68% in the US.5 Further, it seems likely to us that China’s deeper economic challenges likely will persist without measures targeting the oversupply of real estate in lower-tier cities and the bad debts related to it, as well as local governments’ heavy reliance on the property market.

All That Glitters

As we think about the potential trajectories of the world’s two largest economies, we’re cognizant of the many risks that threaten to upend any sort of fundamental analysis. Unrestrained government debt globally has raised the specter of currency debasement and other adverse financial outcomes, for example, while geopolitical risk—headlined by Ukraine/Russia and broadening military engagement in the Middle East—shows no sign of relenting. Nearing the end of what was a very active year in national politics, all eyes now have turned to the contentious race for president in the US, the results of which may have broad policy implications affecting both domestic and cross-border actors.

Given gold’s history as a perceived “safe haven” during periods of turmoil, recognition of these and other global risks—alongside with traditional tailwinds like falling real interest rates and a weaker dollar—likely supported its strong rally during the third quarter, helping the metal set a series of new nominal highs as it climbed 12.9%.⁶ Risk sensitivity also may have contributed to gold’s performance in the first half of the year, as the metal gained ground despite conditions like rising real rates and a stronger dollar that generally would be considered headwinds to its price. In fact, gold’s resilience throughout 2024 and its disparate macroeconomic backdrops underscores why we advocate for strategic exposure to gold as a potential hedge against adverse market outcomes.

While we remain concerned about the many risks facing investors in the current environment, we also see opportunity. But rather than making bets on the direction of markets, we continue to focus on investing in individual assets we believe represent scarce quality and value and the potential to demonstrate resilience across multiple states of the world. We have been selectively adding and trimming names as opportunity dictates, targeting a semi-beta portfolio that we believe ultimately has the potential to position us to generate above average absolute returns over time while avoiding the permanent impairment of capital.