The story in the first half of 2024 was Big Tech, AI, and the market concentration in the Magnificent 7. That story changed in the third quarter. Some are calling it “the great rotation.”
You see this rotation in the returns over the last three months. What drove the S&P 500 returns, for example, from January to June was mostly flat from July to September. The Info Tech and Communication Services sectors were the best-performing market sectors by a massive margin through the first half of the year. Three months later, they no longer sit on top. The Utilities sector is the best performer year to date due to a 19.4% rally in Q3. And utilities were one of several sectors that rallied this past quarter.
That same rotation can also be seen in U.S. REITs (16.8% gain in Q3) U.S. Small caps (9.3% gain in Q3), Emerging Markets (8.9% gain in Q3), and International Markets (7.3% gain in Q3) indices. Each outperformed the S&P 500 over the last quarter.
While there is no guarantee this continues, it’s a sign of a healthy market when money seeks out cheap over expensive. It’s certainly better than a FOMO-driven market where money chases a handful of stocks simply because they went up a lot.
If anything, the past three months have been a great reminder of the benefits of diversification and why timing the market is a losing proposition. Asset classes, sectors, and global markets move in and out of favor. It’s impossible to guess when or for how long these cycles last.
Diversification is most often touted as a defensive tool to limit losses. It can also enhance gains. A diversified portfolio benefits from these unpredictable rallies. It does so without the need to guess when and where it happens next.
A note before getting to the third-quarter highlights. The asset class, sector, international markets, and emerging market return quilts are up-to-date through September 30, 2024. Hit the links for each one.
You’ll find four tables below. The US sector, developed markets, and emerging markets tables break down the monthly total returns. The last table is a quarterly breakdown of global markets. Here are a few highlights:
- The Utilities sector experienced a massive jump of 19.4% in the third quarter, making it the best-performing sector with a year-to-date return of 30.6%.
- Big tech was the story for the first half of the year. Not so, to start the second half. The best-performing sectors through the first half of the year — Info Tech and Communications — slowed to a halt in Q3. While both sectors added to their gains, it was only 1.7% and 1.6% respectively in Q3. Those were the second and third-worst returns in the third quarter, only ahead of the Energy sector.
- The new story (for q3 at least) is sector rotation. Utilities, Financials, Industrials, and Real Estate rallied with double-digit gains over the last three months.
- 8 of the 11 U.S. sectors outperformed the S&P 500 in Q3. Utilities, Financials, Industrials, Real Estate, Consumer Staples, Health Care, Materials, and Consumer Discretionary beat the S&P 500. Info Tech, Communications, and Energy fell short. The Energy sector was the only sector to lose ground over the last three months.
- That makes 5 of 11 sectors with a total return of more than 20% year to date (compared to three months ago, where only two sectors exceeded 20%.) A sixth sector — Consumer Staples — sits just shy of that mark at 18.7% return. And all sectors are positive year to date.
- Portugal is the only developed market with a loss in 2024 so far. That’s down from 4 countries at the end of Q2.
- Only two developed markets experienced a loss in Q3 — Netherlands and Denmark. Both have double-digit returns on the year, despite those losses.
- 20 out of 47 developed and emerging markets rallied 10% or more in Q3. 13 of those 47 markets have a total return of 20% or more year to date.
- Broad emerging markets rallied about 9% in Q3 to a 17.2% return YTD. China’s market led the way with a 23.9% return in September! That’s the single biggest return, in any month and for any global market, this year so far.
- China has been one of the worst-performing markets over the last three years. It experienced losses in 2021 (-21.6%), 2022 (-21.8%), and 2023 (-11.0%). It’s up 29.6% in 2024.
- Not to be outdone, Thailand and Hong Kong were the only markets to outperform China in the third quarter.
- The number of emerging market countries with a loss on the year dropped from 10 last quarter to 4 through Q3. South Korea, Brazil, Mexico, and Egypt sit at loss on the year.
Related Reading:
2024: Q2 Returns
2024: Q1 Returns