Trust Investment Management
Performance across equities and fixed income was robust in the third quarter as they all posted mid to high single digit returns. While the quarter began strong, weaker than expected unemployment numbers stoked fears of recession, causing a selloff in August. This selloff was short-lived after earnings reports continued to show resiliency and the Fed confirmed that it was time to begin easing. In September, the Fed followed through with a large 50 basis point rate cut which served as a tailwind for the markets.
U.S. large cap continued to trend higher, and the S&P 500 closed out the quarter at an all-time high. U.S. small cap was the best performer in Q3. The asset class is typically more sensitive to interest rates, since it relies more on borrowing than large cap, and rallied as the Fed began lowering rates. Both developed international and emerging markets also provided robust returns. Fixed income was not left out and also trekked higher as yields retreated (bond prices and yields are inversely related). The Fed is expected to continue reducing rates which should support a soft landing for the U.S. economy.
The Fed suggested it will gradually cut rates until it reaches the neutral rate (a level that does not stimulate or hold back the economy), which is believed to be approximately 3%. In conjunction with the Federal Open Market Committee (FOMC) meeting held in September, meeting participants submitted their projections for the most likely outcomes of real gross domestic product (GDP) growth, the unemployment rate, and inflation. The median projections propose that real GDP and unemployment will remain fairly steady over the next three years while PCE inflation continues to slowly decline, reaching 2.0% in 2026.
This year has been volatile one, as it included recession fears, global unrest, and the confrontations of adversarial politics. While volatility is expected to persist, the future has potential. Inflation is declining, the Fed is easing, and the economy seems to continue its glide path toward a soft landing.
