Stocks, bonds up in third quarter amid 'soft landing' hopes - but gold beat both

By Christine Idzelis

SPDR Gold Shares ETF surged in the third quarter

Markets wrapped up a strong third quarter for stocks and bonds, as investors ended September seeming more convinced that the Federal Reserve may pull off a soft landing for the U.S. economy after all.

"There's more confidence that we're going to stick the soft landing," said Michael Arone, chief investment strategist for State Street Global Advisors, in an interview on Monday. But soft landings are "rare," and gold's outperformance suggests skeptical investors are still hedging against risks to the economic outlook, he said.

SPDR Gold Shares GLD, an exchange-traded fund that invests directly in physical gold and tracks spot prices of the yellow metal (GC00), has soared 27.1% this year, including a slightly more than 13% gain in the third quarter, according to FactSet data. That exceeds both the S&P 500's SPX 5.5% rise in the third quarter and the U.S. stock benchmark's 20.8% jump this year.

The start of the Fed's interest-rate-cutting cycle in September was widely anticipated in markets, although questions had swirled around the size of the first rate cut before the central bank's Sept. 18 decision to go with a large, half-point reduction. The Fed has been aiming to engineer a so-called soft landing, a scenario in which it avoids unnecessarily triggering a U.S. recession despite previously aggressively hiking rates to tame high inflation.

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U.S. bonds also rallied in the third quarter, with September extending a monthly winning streak seen in popular exchange-traded funds that provide broad exposure to fixed-income assets.

For example, the iShares Core U.S. Aggregate Bond ETF AGG, which tracks the U.S. investment-grade bond market, gained a total 5.3% in the third quarter for a year-to-date total return of 4.6%, FactSet data show. The ETF just booked its best quarterly performance of 2024.

Riskier corporate bonds in the U.S., known as high-yield or junk, have seen even larger gains.

The iShares iBoxx $ High Yield Corporate Bond ETF HYG jumped 5.7% in the third quarter on a total-return basis, bringing its total gain so far this year to 8.1% through Monday, the final trading day of the quarter.

Similarly, the SPDR Bloomberg High Yield Bond ETF JNK, which trades under the ticker "JNK," has posted a total return of 7.9% so far this year, including a 5.5% gain in the third quarter.

The rally in junk bonds reflects investors perceiving a higher probability of a soft landing, the Fed beginning to cut rates, and growth in U.S. corporate earnings and profit margins in the second quarter, according to Arone.

Companies will begin releasing third-quarter earnings results in October.

"As long as profit margins are expanding, it should be pretty good for high-yield," said Arone.

Meanwhile, declining rates will help refinancing efforts of high-yield borrowers in the corporate bond market, he said. The "pickup" in yield that investors can capture in junk bonds is attractive, with the benefits of holding high-yield securities currently appearing to outweigh the risks, according to Arone.

"Our economy is strong overall," said Fed Chair Jerome Powell during his press conference on Sept. 18. "The labor market has cooled from its formerly overheated state," he said, while "inflation has eased substantially."

Still, Arone favors a small allocation to gold to generally hedge against the risk of a recession, even if that's not his base case.

Long-term investors should generally consider a 3% to 10% allocation to gold, as the yellow metal can help portfolios withstand times of turmoil, including the "unknown unknowns," he said.

The last time SPDR Gold Shares booked a quarterly gain of slightly more than 13% was the second quarter of 2020, when markets were grappling with lockdowns caused by COVID-19, according to FactSet data.

Meanwhile, falling rates mean the "opportunity cost" for gold is shrinking, said Arone. The U.S. economy may wind up with a soft landing, or no landing at all, but "you want to own some in case you're wrong," he said.

-Christine Idzelis

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09-30-24 1721ET

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