The US stock market has experienced a remarkable third quarter, with the S&P 500 Index reaching new heights. However, this growth has been largely driven by a select group of large-cap technology companies, resulting in a significant disparity between the market-cap weighted S&P 500 Index and its equal-weighted counterpart. Additionally, growth stocks have significantly outperformed their value counterparts.
The Federal Reserve’s median projection indicates that policymakers expect only one 25 basis points interest rate reduction in 2024, down from three cuts projected in March. Meanwhile, a majority of economists forecast two rate cuts this year.
In this environment, the Russell 1000 Value Index returned -2.17% for the quarter, with nine out of 11 sectors declining. Consumer discretionary and healthcare were the worst-performing sectors, while utilities and consumer staples were the top performers.
The Hartford Quality Value ETF outperformed the Russell 1000 Value Index during the quarter, driven primarily by security selection. Strong selection within healthcare, industrials, and financials was partially offset by weak selection within materials, utilities, and real estate. Sector allocation also contributed to returns, driven by an overweight to utilities.
Looking ahead, the Federal Reserve faces the challenging task of balancing resilient employment with moderating inflation. The path of interest rates will be heavily data-dependent, with policymakers monitoring key macroeconomic indicators such as consumer spending, business sentiment, wage growth, and employment.
We believe that opportunistically investing in out-of-favor growth and cyclical names with positive risk/reward skews provides upside exposure while maintaining an overweight to more defensive segments may provide the opportunity for upside participation while insulating the portfolio from valuation-driven corrections.
As of the end of the period, our largest overweights were to the communication services and healthcare sectors, while we were most underweight in industrials and financials.
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