October - Markets & Economic Update
While the elections (as well as the expected tax outcomes either way) dominate a lot of the conversations I’ve been having with clients lately, I wanted to give an update on the other aspects of the current economic and financial landscape. I’ll spend some time on the election in a separate post, but there have been important developments in the areas I listed below, and I want to keep you informed about how these changes might affect your investment strategy.
Economic Overview and Stock Market Performance
We’ve been really pleased that long-term investors with stock-heavier diversified portfolios have seen solid returns, particularly in September. The major U.S. equity market indexes have continued their impressive upward run since May, with the S&P 500 rising for three consecutive weeks in September alone. For the month, the S&P 500 added 2.02%, the Nasdaq 100 increased by 2.48%, and the Dow Jones Industrial Average rose by 1.85%.
This performance is particularly noteworthy given that September started with the S&P 500's worst week of 2024 due to initial labor market concerns after a similar short scare at the beginning of August. The quick recovery demonstrates the market's resilience and adaptability to changing conditions. In fact, September turned out to be the best we've seen for stocks since 1997, showing the current strength in the market. We hear a lot about “October surprises”, so that will be interesting to watch, but overall the markets feel good about things right now.
Fed Policy and Interest Rates
Obviously this has been the biggest driver of returns since the beginning of 2022, both good and bad. After a year of keeping rates level after their historic increases in 2022, the most significant news of the past month was the Federal Reserve's decision to cut interest rates by 50 basis points. This marks the first rate cut in four years and represents a more aggressive stance than the 25 bp many anticipated before some jobs data that had seemed a bit more concerning. The Fed with their dual focus on inflation and the labor market felt like the rate of inflation was trending to an area they were comfortable with and didn’t want things to start deteriorating too much on the jobs side. The market response to this decision was overwhelmingly positive, with both the Dow and S&P 500 jumping to record highs the day after the announcement.
Fed Chair Powell introduced the term "recalibration" to describe this policy shift. The message conveyed is one of strength in the overall economy, emphasizing that the rate cut was not due to economic weakness but rather a proactive measure to maintain robust economic conditions. This aligns well with the strong economic data we've seen, particularly in the labor market.
Looking ahead, the Fed's Summary of Economic Projections suggests an additional 50 basis points of cuts are expected for the remainder of 2024, although a much stronger than expected jobs report last week could reduce the need for that. This more accommodative stance aims to support the economy and ensure continued growth.
Labor Market Developments
As mentioned, the September jobs report significantly exceeded expectations, showing that the economy added an impressive 254,000 nonfarm jobs in September, surpassing estimates by 100,000.
Furthermore, the unemployment rate decreased to 4.1%, down from 4.2% in August. This decline in unemployment, coupled with the strong job growth, paints a picture of a robust and healthy labor market. It also pulls back on a recession indicator that had some focus over the last few months, called the Sahm Rule. These figures are particularly encouraging as we approach the holiday season and year end.
While there are some questions under the hood, such as an increase in people working multiple jobs, the strength of the job market adds a new dimension to our economic outlook. While the Fed has signaled the possibility of additional rate cuts in 2024, the strength of the labor market might influence the timing and magnitude of these potential cuts.
Inflation Trends
The overall trend for inflation showed further cooling in September, much to the delight of stock market bulls, and leading to the Fed feeling comfortable with their bigger cut. The Consumer Price Index (CPI) data released in September (for August) revealed an annual increase of 2.5% – the lowest annual inflation rate since 2021. While prices remain elevated compared to historical norms, we are making significant progress toward the Fed's 2% inflation target.
The Producer Price Index (PPI) and Personal Consumption Expenditures (PCE) data also came in line with or below expectations, further supporting the narrative of cooling inflation. The PCE, the Fed's preferred inflation gauge, showed prices rising 2.2% annually, psychologically very close to the Fed's 2% goal.
Treasury Yields and the Yield Curve
An important development in the bond market was the "uninversion" or normalization of the yield curve in September. For the first time in 793 days – the longest yield inversion (where long-term rates are higher than shorter-term) in history – the 10-year Treasury yield rose above the 2-year yield. By the end of September, the 10-year yield stood at approximately 3.803%, with the 2-year at 3.645%.
The interpretation of this yield curve normalization is up for debate. Historically, it’s been seen as an indicator that precedes recessions. However, given our current economic picture, particularly the strength in the job market & the Fed's proactive stance, recession odds seem low. It's just one thing to consider alongside other positive economic indicators.
Consumer Behavior
Consumer data in September was a mixed picture. Retail sales showed a modest increase of 0.1% in August, while consumer confidence dropped in September to 98.7, below expectations of 103.9. These figures suggest some caution among consumers, and we'll closely monitor how the Fed's recent rate cut and the strong job market affect consumer behavior in the coming months, especially in the holiday season. The threatened port workers strike started some pandemic-like buying in certain places for a day or 2, but was resolved (or postponed) pretty quickly.
Looking Ahead
As we move forward, these are the main things we’ll be keeping an eye on:
The impact of the Fed's rate cuts on inflation & economic growth, especially in light of the strong labor market
Whether job growth (& potential for further wage growth) holds up & translates into increased consumer spending and confidence and whether inflation can keep a downward trend leading to further hopes that the Fed can navigate the “soft landing” that has been discussed so much.
Yield curve normalization vs the economic indicators for whether we avoid recession.
Geopolitical developments and their impact on global markets, especially with the escalations with Israel and Iran, and the impact on oil and energy prices.
The upcoming U.S. presidential election and its potential market implications, especially in light of differences in expectations for regulation, taxes, tariffs, etc depending on the outcome.
Summary
In conclusion, the current economic picture is largely positive, with strong market performance, a robust job market, and cooling inflation. However, we're also navigating a complex environment with some mixed signals in areas like consumer confidence. The Fed's proactive approach, coupled with strong economic fundamentals and continued strong corporate earnings and AI-related investment and spending, provides reason for optimism as we head into the final months of 2024.
As always, our focus remains on your long-term financial goals. We're committed to adjusting strategies as needed in response to these evolving economic conditions. The strong job market and the Fed's accommodative stance provide a solid foundation, but we want to stay vigilant to any potential challenges or shifts in the economic landscape.
I want to emphasize that your personalized investment strategy is designed to weather various economic conditions. While we're encouraged by the current positive indicators, we continue to maintain a diversified approach that aligns with your risk tolerance and long-term objectives.
If you have any questions about how these developments might affect your personal financial strategy, or if you'd like to discuss your portfolio in more detail, please don't hesitate to reach out. We're here to help you navigate these complex times and ensure your investment strategy remains aligned with your goals.
Thank you for your continued trust and partnership. We look forward to supporting your financial journey through the remainder of 2024 and beyond.
For additional details, including some helpful charts and returns data, click here for IFG’s Metrics that Matter for October.
All the best,
Jeff Boyd, CFP®, CEPA®
CERTIFIED FINANCIAL PLANNER™
Registered Representative offering securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Phase Four Financial Solutions, Orion, and IFG are unaffiliated entities.
No investment strategy can guarantee a profit or protect against loss. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Diversification does not guarantee profit nor is it guaranteed to protect assets.
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