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Markets shifted tone and investors grew more anxious of the current economic environment as foreign trade policy took hold with the Trump administration’s announcement of a 10% universal tariff and additional tariffs on various countries. Consumer confidence fell, touching levels last seen in 2021, as the risk of recession grew and inflation remains elevated.

The third quarter was strong for seemingly all investment assets. That said, the current market rally was thrown off course in late early August as investors reacted to a weaker-than-expected jobs report, fueling concerns that a stumbling labor market implied a recession may be looming. After retracing 8.5% by early August, the S&P 500 had just about fully recovered by the end of the month, and subsequently powered to new highs after the Federal Reserve delivered a 50 basis point rate cut (or 0.50%).

The Federal Reserve’s decision to cut rates by another 50 basis points (or 0.50%) was a key event in the quarter, leading to a mixed reaction across investment markets. The 10-year U.S. Treasury yield soared by over 75 basis points, indicating resistance from the bond market due to concerns of more persistent inflation and uncertainty around the impact of potential policy changes.

Growth remains positive and core inflation moderated from 3.8% to 3.3% during the quarter. The current market environment has provided room for the Federal Reserve to reduce the Fed Funds rate. This sentiment fueled the equity market and “riskier” segments of fixed income, such as high yield. Valuations have moved higher on the back of strong price movement, however this shift was mostly attributed to the concentrated top constituents.

Defying investor expectations, the U.S. economy continues to be defined by one word: resilient. U.S. GDP has grown above 2% in each of the last six quarters and the labor market remains strong. Against this healthy economic backdrop, the equity market and “riskier” segments of fixed income pushed higher during the first quarter. Valuations have moved higher on the back of strong price movement while earnings growth has been muted. Expectations are for positive earnings growth in Q1 (3.6%) and for calendar year 2024 (11.0%) but margin pressures may be a headwind.