The third quarter saw most major asset classes benefiting from continued enthusiasm around Artificial Intelligence (AI) and the increased prospects of near-term interest rate cuts from the Federal Reserve and other influential central banks. Investors have come to expect rising stock market prices of late, with the S&P 500 index looking to register a third straight year of double-digit gains. While technology stocks continued to perform well in the U.S., strong investment results were also observed internationally. The Chinese market, for example, benefited from both its temporary trade truce with the U.S. and renewed optimism around their efforts designing semiconductor chips.
At home, the S&P 500 stock index rose over 8% during the quarter, supported by strong corporate earnings that surpassed analyst expectations. Key drivers for the market’s success, and that of the broader economy, have been related to the technology sector as major computing firms have invested record amounts of capital in cloud and AI capabilities. Just a couple of weeks ago, Nvidia shared with analysts that they are expecting an additional $3 to $4 trillion dollars of infrastructure spending to occur by 2030.
Another notable investment theme has been strength in gold, rising by over 40% year-to-date to over $4,000 per troy ounce. The precious metal can serve as an effective hedge against inflation as well as a safe-haven asset during periods of economic stress or geopolitical turmoil. There have been various recent events driving gold’s performance, beginning with the war-related freezing of Russia’s foreign assets. More recently, demand for gold has been bolstered by rising European and U.S. government debt, uncertain global trade policies, and other geopolitical risks and sanctions. According to the World Gold Council, much of the increased demand for gold has come from the largest international financial institutions.
On the banking front, Federal Reserve Chair Jay Powell and his fellow committee members have drawn increased scrutiny as they balance their dual mandate of full employment and price stability within the U.S. economy. Notably, the Fed pivoted in September by making a softening job market their number one concern (instead of inflation). This resulted in Chair Powell lowering interest rates to 4% while also signaling two additional rate cuts by year-end. Of course, economists had varying reactions to the Fed interest rate decision, particularly given that inflation was still registering above the Fed’s stated goal of 2% (September’s CPI report on inflation came in at 3.1%). Consequently, a new risk last seen in the 1970’s is garnering investor attention: that of stagflation, an economic condition where growth stagnates, inflation reignites, and rising unemployment takes hold.
Going forward, investment diversification should continue to play a key role for investors by offering protection from market risks (such as a slowing in the technology sector). Conservative fixed income investments can also be a valuable source of income and stability. With global stock indices at or near record levels, investors are understandably on edge, with limited capacity to absorb additional negative developments such as an extended government shutdown. In addition, economists will also be monitoring other unresolved market issues, such as the Trump Administration’s handling of trade negotiations with China, Mexico, and India.
