ALTERNATIVE MARKETS UPDATE – END SEPTEMBER 2024

​It has finally happened. The Fed cut rates for the first time since the unprecedented hikes began in 2022. Throughout 2024, hikes were expected at almost every meeting and investors were consistently disappointed. Initially, falling inflation was the main driver of these expectations. Once inflation fell below 4%, there was little further decline. Traders argued that inflation had come down significantly and was likely to continue to do so even with lower interest rates due to the usually lagged effects of central bank measures. Instead, the central bank moved much more cautiously and wanted to monitor inflation developments. At one point, inflation proved to be sticky and did not fall much below 3%. Occasional fears of recession reappeared, offset by a strong labour market. These recession fears began to rise as soon as the labour market started to weaken. In recent months, the focus has shifted away from inflation. Instead, the focus has been entirely on employment data. This culminated in the run-up to the September meeting, when a first rate cut was almost inevitable for the hesitant Fed. Given this caution, most market participants were expecting a 25bps cut, with a few predicting a 50bps cut. Surprisingly, the Fed did indeed cut by 50bps to 4.75%, with comments on further cuts in its two remaining decisions this year. Expectations for the federal funds rate at the end of 2024 now range from 4% to 4.25%. Figure 1 shows this in more detail. The Bank of England has also cut rates only once this year, in August, while the European Central Bank has already cut twice. Switzerland stands out, as its central bank has cut interest rates three times in 2024, with the first cut already in March 2024.  Figure 2 shows the respective interest rates from January 2023 to September 2024.

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RESEARCH PERSPECTIVE VOL. 236 September 2024 Alternative Markets Update It has finally happened. The Fed cut rates for the first time since the unprecedented hikes began in 2022. Throughout 2024, hikes were expected at almost every meeting and investors were consistently disappointed. Initially, falling inflation was the main driver of these expectations. Once inflation fell below 4%, there was little further decline. Traders argued that inflation had come down significantly and was likely to continue to do so even with lower interest rates due to the usually lagged effects of central bank measures. Instead, the central bank moved much more cautiously and wanted to monitor inflation developments. At one point, inflation proved to be sticky and did not fall much below 3%. Occasional fears of recession reappeared, offset by a strong labour market. These recession fears began to rise as soon as the labour market started to weaken. In recent months, the focus has shifted away from inflation. Instead, the focus has been entirely on employment data. This culminated in the run-up to the September meeting, when a first rate cut was almost inevitable for the hesitant Fed. Given this caution, most market participants were expecting a 25bps cut, with a few predicting a 50bps cut. Surprisingly, the Fed did indeed cut by 50bps to 4.75%, with comments on further cuts in its two remaining decisions this year. Expectations for the federal funds rate at the end of 2024 now range from 4% to 4.25%. Figure 1 shows this in more detail. The Bank of England has also cut rates only once this year, in August, while the European Central Bank has already cut twice. Switzerland stands out, as its central bank has cut interest rates three times in 2024, with the first cut already in March 2024.  Figure 2 shows the respective interest rates from January 2023 to September 2024. Figure 1: US Inflation and Federal Fund Rate from 2023 to September 2024, Sources: U.S. Bureau of Labor Statistics, Federal Reserve & Trading Economics, September 2024 Figure 2: Interest Rates in the EU (Main Refinancing Fixed Rate), UK and Switzerland from January 2023 to September 2024, Sources: European Central Bank, Bank of England & Swiss National Bank, September 2024 US equities and equities in general have struggled since July 2024. This downturn ended with the unwinding of the USD-JPY carry trade and subsequent recession fears, which led to a one-day crash. Markets quickly recovered, but the general downward trend continued. During this period, recessionary fears were heightened by potentially very high interest rates. This changed with the Fed's rate cut, which sparked another rally. This led to new record highs for many equity indices. To date, the S&P 500 and the Nasdaq Composite have risen more than 20%, while the Dow Jones recently passed the 10% mark. The S&P 500 reached a new record high of 5,767 and the Dow Jones climbed to a new record high of 42,628. The Nasdaq Composite is slightly below its previous record of 18,671 set in July. Figure 3 shows the performance of the above indices over the year. Figure 3: Performance of the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite from January 2024 to September 2024, Source: Dow Jones, Standard & Poor’s, Nasdaq & Investing, September 2024 Gold has also performed exceptionally well in 2024 to date. The yellow commodity has appreciated by over 25% this year, reaching several new record highs. The commodity is on course to reach the previously unthinkable $3,000 per ounce. The commodity approached the $2,700 mark last week, reaching a new record high. The commodity has gained further traction due to elevated recession fears, interest rate cuts by the Federal Reserve, and the Chinese stimulus package recently introduced. Similarly to equities, cryptocurrencies have experienced challenges in recent months. Cryptocurrencies began the year 2024 with a strong performance, achieving approximately 70% growth by March. Since that time, cryptocurrencies have experienced occasional declines and subsequent rebounds, but not to the levels observed in March. During the sharp sell-off in August, the value of cryptocurrencies remained low. In particular, Ethereum suffered significant losses, erasing all of its 2024 gains on some occasions. Despite the decline, Bitcoin managed to maintain a portion of its previous performance. Following the positive news from the Federal Reserve, cryptocurrencies began to gain traction once more, closing the month with double-digit gains. Currently, Bitcoin is up approximately 50% for the year, while Ethereum has gained around 15% in 2024. Figure 4 illustrates the indexed performance of gold in comparison to cryptocurrencies. Figure 4: Indexed Performance of Bitcoin, Ethereum and Gold from January 2024 to September 2024, Sources: CoinMarketCap, SPDR Gold Shares & Investing, September 2024 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates and Tallinn in Estonia. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 2nd February 2024, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 62.4 billion. 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