Market Update – Sept 23rd, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, September 23rd, 2024

Financial Markets

Stocks rallied last week and even reached new all-time highs on Thursday, as investors were encouraged by the Federal Reserve’s jumbo 50 basis point rate cut. As of the close on Friday, September 20th, the Nasdaq Composite gained 2.02%, the S&P 500 rose by 1.23%, and the Dow Jones Industrial Average was up by 1.06%. In contrast, bonds had a negative week, with the Barclays Aggregate Bond Index declining -0.49%.

Market News

First Rate Cut. The Federal Reserve cut the Federal Funds Rate for the first time in over four years last Wednesday, slashing it by 50 basis points from a range of 5.25%–5.5% to 4.75%–5%. Prior to the announcement, market expectations were mixed, with many models predicting a smaller, 25 bps cut. As a result, markets were caught off guard by the full half-percentage point reduction and rallied on Thursday following the move.

In the press conference, Federal Reserve Chair Jerome Powell emphasized that the decision to implement a larger rate cut was a precautionary measure aimed at guarding against a potential economic downturn, rather than an aggressive attempt to rescue the economy. Powell made it clear that this cut should not be seen as a response to a severe economic crisis, but rather as a proactive step to stabilize labor market and inflationary conditions moving forward.

This rate cut marks the first change in the Federal Funds Rate since July 2023, when the Fed enacted its last 25 bps rate hike of the cycle, signaling a notable shift in monetary policy as economic conditions evolve.

Summary of Economic Projections. In addition to the rate cut, the Federal Reserve released its quarterly Summary of Economic Projections (SEP), offering insights into FOMC members’ predictions for interest rates, labor market conditions, inflation, and GDP in the coming years. The latest SEP, the first since June, reflects quite a few changes in the Fed’s outlook, including more aggressive rate cuts, higher unemployment, and lower inflation.

Interest Rates: The rate cut projections in the September SEP were notably more aggressive than those in June. The projected year-end Federal Funds Rate moved down from 5.1% to 4.4%, a significant change of 70 bps, equating to nearly three 25 bps cuts. This adjustment leaves room for two potential 25 bps rate cuts in the remaining November and December FOMC meetings of 2024.

Labor Market Conditions: The unemployment rate forecast for year-end increased from 4% in June to 4.4% in this SEP, reflecting the changes in recent jobs reports where the unemployment rate has risen above 4%.

Inflation: Headline Personal Consumption Expenditures (PCE) inflation expectations fell from 2.6% to 2.3% since June. This downward trend in inflation provided the Fed with the confidence to implement this 50 basis point rate cut, as inflation has been consistently moving in the right direction.

GDP: Projections for real GDP growth were revised slightly downward, with annual growth expected to be 2% in Q4, down from 2.1% in June’s SEP.

Source: Federal Reserve

Retail Sales. Ahead of the Federal Reserve’s Wednesday FOMC meeting, August retail sales exceeded expectations on Tuesday, rising 0.1% compared to forecasts of a -0.2% decline. Year-over-year, retail sales increased by 2.1%, but with 2.5% inflation factored in, this translates to a -0.4% real decline from August 2023, signaling some weakness in consumer spending.

Nonstore retailers, particularly online shopping, were a major growth driver, with e-commerce sales up 7.8% from a year ago. While headline retail sales data exceeded expectations, the inflation-adjusted figures reveal a real decline in consumer spending, reinforcing the view that the Fed’s rate cut may have been a prudent decision last week to prevent further declines in economic growth.

Leading Indicators. In August 2024, the Conference Board’s Leading Economic Index (LEI) for the U.S. declined by -0.2% to 100.2, following a -0.6% drop in July, also marking the sixth consecutive monthly decline. While the LEI has continued to fall throughout 2024, the rate of decline has moderated compared to last year.
 
August’s LEI weakness was primarily driven by soft new orders and an inverted yield curve, as indicated by the 10-year Treasury yield minus the federal funds rate. On the other hand, the leading credit index and building permits helped to partially offset these negative trends. Overall, this remains a bearish indicator, although it appears less bearish than a year ago.

Existing Home Sales. August existing home sales data revealed a sluggish residential real estate market, with sales volumes declining by -2.5% after a brief uptick in July. On a year-over-year basis, sales volumes were down -4.2%. Meanwhile, housing inventory increased to 4.2 months’ worth, up from 3.3 months in August 2023, signaling slightly more supply in the market. The median home price saw a modest annual increase of 3.3%, reaching $416,700.

Although the Federal Reserve has started cutting rates, these actions take time to filter through the economy, meaning the real estate market may not feel the full impact of rate cuts for some time.

Source: National Association of Realtors

Summary

Last week, stocks hit new all-time highs, driven by the Federal Reserve’s jumbo 50 basis point rate cut, the first in over four years, reducing the Federal Funds Rate to 4.75%–5%. Additionally, in the Fed’s quarterly Summary of Economic Projections, the central bank reflected a more aggressive trajectory for future cuts. Also in the past week, August retail sales exceeded expectations, however inflation-adjusted figures indicated a real decline in consumer spending from a year ago. Lastly, the Leading Economic Index continued to decline and existing home sales showed weakness despite a slight increase in median prices in August.

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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