Market Update – Sept 16th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, September 16th, 2024

Financial Markets

Stocks rebounded further from early September losses as CPI data boosted confidence ahead of the FOMC meeting and highly anticipated rate cut this week, bringing indices closer to their all-time highs. As of Friday, September 13th, the Nasdaq Composite led major indexes with a 4.74% gain, followed by the S&P 500, which rose by 2.83%, and the Dow Jones Industrial Average, which rose by 1.35%, while the Barclays Aggregate Bond Index gained 0.38%.

Market News

August CPI. Last week, we received the final CPI reading ahead of this week’s highly anticipated Federal Reserve meeting, where it is widely expected that the Fed will begin cutting interest rates. August’s annual CPI inflation clocked in at 2.5%, slightly below estimates, while core CPI, which excludes food and energy prices, stood at 3.2%, slightly above expectations. On a monthly basis, inflation was up by 0.2%, with core CPI increasing by 0.3% from the previous month.

Within the CPI, grocery prices rose by 0.9% compared to a year ago, while dining out saw a sharper increase, up 4%. Energy costs, on the other hand, fell by -4% compared to August 2023, and used vehicle prices continued their decline, dropping by -10.4%.
 
Shelter remains a key driver of inflation, rising by 5.2% in August, which is notable as shelter costs make up the largest share of the CPI calculation. When shelter is taken out of the CPI, inflation has consistently been below 3% since May 2023 and was just 1.1% YoY in August. This is encouraging for consumers with fixed shelter costs, such as those with fixed-rate mortgages secured before rates increased. However, renters and prospective homebuyers continue to bear the brunt of high shelter inflation, which disproportionately affects those without fixed housing costs.

With the Federal Reserve meeting approaching, market expectations have shifted following this most recent CPI report. A week ago, there was a 70% chance of a 25-basis-point rate cut on September 6th, but as of September 13th, that likelihood has dropped to 55%. The alternative possibility, a larger 50-basis-point rate cut, has seen its probability rise from 30% to 45% over the same period.
 
Overall, inflation has been steadily approaching the Federal Reserve’s 2% target and this week’s Federal Reserve meeting will provide more guidance to markets on how the US central bank is viewing inflationary pressures.

August PPI

August PPI. Thursday’s Producer Price Index report, a key indicator of wholesale inflation, showed that headline PPI rose 1.7% on a 12-month basis, while core PPI, excluding food, energy, and trade, increased by 3.3% in August. On a monthly basis, headline PPI was up 0.2%, with core PPI rising 0.3%.

Services remained the main driver of wholesale inflation, with service costs increasing by 0.4% for the month, while goods prices stayed flat, highlighting a divergence between service and goods-related inflation pressures. Another month of stable producer inflation provides further evidence that the Federal Reserve may be inclined to cut rates this week.

Consumer Sentiment

Consumer sentiment in September reached its highest level since May 2024, marking the second consecutive month of improvement and rising by about 2% compared to August. Expectations for personal finances and the economy over the next year also improved, although labor market optimism declined slightly.
 
The overall trend in consumer sentiment has been positive in the last two years, as sentiment is now around 40% higher than its low point in June 2022. Consumers remain cautious in regard to the upcoming election, although this month’s survey showed an increasing number of both Republicans and Democrats expecting a Vice President Harris win.

Source: University of Michigan

Employment Trends Index. The Conference Board’s Employment Trends Index rose to 109.04 in August, reflecting continued strength in household spending and production. On the other hand, softness in the labor market has been a negative component in the ETI, as the share of respondents who report that “jobs are hard to get” increased to 16.4% in August 2024, up from 11% at the beginning of the year.
 
Despite this, the Conference Board suggests that these developments indicate a normalization of labor markets rather than an early recession signal. The bounce in August’s ETI coincided with a positive Employment Situation Report, which showed healthy payroll expansion, a decrease in unemployment, and no signs of a rapid deterioration in the labor market.

Looking at a larger list of economic indicators, our recessionary dashboard includes four bearish, two neutral, and two bullish signals. While we remain cautious due to softening labor market conditions, election uncertainty, and geopolitical risks abroad, other indicators, such as the stock market, which is often a forward-looking gauge, remain high and signal confidence.

Summary

Stocks regained ground last week as inflation data lifted confidence ahead of this week’s highly anticipated Federal Reserve meeting, where the Fed’s first rate cut is expected. The August CPI report showed inflation at 2.5%, slightly below estimates, while core inflation, which excludes food and energy, came in at 3.2%, slightly above forecasts. Similarly, the Producer Price Index indicated stable wholesale inflation in August, consumer sentiment improved for the second consecutive month, reflecting optimism despite election concerns, and the Employment Trends Index indicated stable labor market conditions.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.

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