Market Update – September 22nd, 2023

Author: Joe Maas, CIO, SPG Advisors, LLC

Financial Markets
All eyes were on Federal Reserve Chair Jerome Powell last week, as the Fed announced a pause on rate hikes for the month of September and raised expectations of where rates may be next year. Ultimately, this spooked equity investors, as the Nasdaq Composite fell -3.55%, the S&P 500 fell -2.77%, and the Dow Jones Industrial Average fell -1.6%, as of close Thursday, September 21st for the week.

Market News

September FOMC Meeting. Out of the eight Fed meetings that happen each year, only four bring us an extremely clarifying Summary of Economic Projection, or SEP, which tells a lot about where Fed members’ heads are at, and this September meeting was one of them. Investors were surprised by the Fed’s longer-term view on interest rates, with the median projected Fed Funds rate for the end of 2024 at 5.1%, up 50 bps from June’s projection of 4.6%. Similarly, the projected Fed Funds rate through the end of 2025 rose 50 bps, from June’s projection of 3.4% to September’s 3.9%.

Other key data from the projections puts the expected unemployment rate at 3.8% for 2023, the same level we saw in August. This was also down significantly from June’s projection of 4.1%. On top of this, FOMC participants see PCE inflation not changing through the end of the year, with the median expected inflation rate at 3.3%, the same level we saw in July.

Source: Federal Reserve

Looking forward to the end of 2023, markets are putting just a 42.3% probability of a rate hike, including a 5.6% chance of 50 bps of rate hikes in store, despite the median projected Fed Funds rate sitting at 5.6%, which would mean a 25 bps hike before the end of this year. As always, we will continue to monitor what the Fed is up to in this Fed-centric economy, along with the same economic data they use to read markets.

Source: CME Group

Leading Indicators Fall in August Again. The LEI, or Leading Economic Index, fell -0.4% to 105.4 in August, as many economic indicators continue to flash red. Lower consumer expectations of business conditions, along with lower new orders and a continued inversion of the yield curve led the LEI to be more bearish in August. This puts the index on a downward trajectory over the last year and a half, which is not a good sign of future economic conditions to come. The LEI is certainly not the end-all, be-all economic projection, however it did predict the last three recessions with timely precision.

Existing Home Sales:

The market for existing homes continues to appear stale, as August existing home sales data shows a sluggish outlook. August’s existing home sales totaled 4.04 million, down -0.7% from July and down -15.3% from last year. The median sales price was up +3.9% from a year ago, to $407,100, as higher mortgage rates keep homeowners in their homes longer. Typically, higher interest rates bring about lower asset prices, however we have yet to see this play out materially in the housing market, with home prices remaining stable and increasing nearly 4% from a year ago.

Source: National Association of Realtors

Initial Claims:

Despite a slightly higher unemployment rate of 3.8% in August, weekly initial claims data continue to reveal that the labor market remains robust. Hiring may be slowing, but large-scale layoffs seem to be a trend of the past – for now. Looking at this week’s data, initial claims for the week ending September 16th came in much lower than expected at 201,000 claims, in a downtrend we’ve seen since a small peak of claims in June. Labor markets appear stable, and we will continue to monitor data closely to catch any shifts in the employment market.

Although the Fed decided against a rate hike at this week’s meeting, Powell and the other FOMC participants did not shy away from their strong tightening stance, raising expectations of how long the Fed will have to keep rates higher. Other important economic data points provided mixed signals this week including bearish leading indicators, a slow existing home sales market, and strong labor data in initial claims. Overall, we remain partially bearish and partially bullish on this unique environment, as we see the end of the rate hiking cycle coming closer to an end. We look forward to continuing to monitor the data as it rolls out in our assessment of economic conditions.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,

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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