The month of September proved to be positive across the markets as the long-awaited interest rate cut cycle began in the US, and rate cuts continue in the Great White North.
In September, the NASDAQ was up 0.4%, the Dow was up 1.1%, and the S&P500 was up 2.0%.
The end of the month saw Canada’s TSX lead the pack with a 2.4% gain. This can be attributed to the Bank of Canada interest rate cuts. The BoC has cut rates from 5% in May to 4.25% in September. Stretching the timeline out a bit, the TSX had its best quarter in the last 4 years. The TSX rose 9.32% in Q3. As interest rates have come down, sectors like Financials, Technology, and Real Estate in Canada have benefitted.
On September 18th, the US Federal Reserve announced their first interest rate cut since 2020 putting an end to the interest rate hike cycle that began in 2022. The Fed cut rates by 0.5% bringing their rate down from 5.5% to 5.0%. Members of the Fed expressed confidence that inflation was moving sustainably towards their target of 2%. With inflation coming down, and future interest rate cuts on the table, equities and fixed income securities are in a position to benefit.
Equity markets have been bouncing back from the August pullback. The S&P500 is leading, but Canada and International markets are catching up.
Over the course of the last 1-2 years, the S&P500 has led the pack on the backs of the Magnificent 7 US tech stocks. However, recently there has been a broadening out of returns with the other 493 companies picking up the slack. During Q3 2024, the Invesco S&P500 Equal Weight Index ETF (EQL) outperformed the market cap Vanguard S&P500 Index ETF (VFV). EQL was up 6.40% and VFV was up 2.15% in Q3.
Equal weight S&P500 ETFs allocate 0.2% to each of the 500 stocks in the index, while the traditional market cap ETFs see the top 7 largest companies have significant sway in the direction of the entire index. Over time, this can result in concentration risk. The recent selloff in tech stocks is a contributing factor to the Q3 performance difference.
