September 23, 2024

“The individual should act consistently as an investor and not a speculator.”

Benjamin Graham

All the major averages closed modestly higher Friday, (the Dow reaching a new record high), as major U.S. stock benchmarks booked weekly gains in the wake of the Federal Reserve’s large interest-rate cut last Wednesday. Last Friday, The Dow rose 38.17 points, or 0.1%, to close at 42,063.36. The Nasdaq Composite fell 65.66 points, or 0.4%, to end at 17,948.32. For the week, the S&P 500 climbed 1.4% the Dow rose 1.6%, and the technology-heavy Nasdaq advanced 1.5%. All three benchmarks logged back-to-back weekly gains and are now up in September. Internationally, the FSTE 100 was off slight .52% but the MSCI-EAFE gained .09% for the week. The 2-year yield closed at 3.597% and the 10-year paid 3.741%.

As widely expected, the Federal Reserve (Fed) on September 18 cut the federal funds rate 50 Basis points (one half of a percent) target for the first time since early 2020. The action marks the Fed’s first move since July 2023, when it lifted the target to a 23-year high. It finally puts the Fed on the same easing course as central banks in Europe, Canada and the U.K. In addition to stimulating economic activity, Fed rate cuts also typically drive down lending rates and yields on cash-equivalent accounts and many bonds. Accordingly, loan rates may become more attractive, while savings and other cash-equivalent accounts may pay lower yields. We believe this scenario highlights timely opportunities in fixed income.

 What prompted the action? According to the analysists at American Century funds, “Fed officials turned their attention from inflation, which has slowed but hasn’t yet reached 2%, to employment. A series of recent reports painted the job market as weaker than originally thought. Policymakers hope their easing will provide a boost to the economy without jeopardizing inflation’s progress and the revered soft-landing economic outlook.

The half-point cut — larger than the quarter-point cut many had expected — dropped the short-term lending rate to 4.75% to 5%. Fed Board Chair Jerome Powell indicated the larger rate cut represented a “recalibration” of monetary policy as risks to inflation and employment become more balanced. He noted the cut aims to prevent further labor market weakness while maintaining the economy’s resilience.

Powell said he still views the current interest rate range as “restrictive” but expects to gradually restore policy to a neutral state. He characterized the half-point cut as “strong” and a sign of the Fed’s commitment to remain proactive. A key Powell message last Wednesday was that the economy does not need an emergency rescue. He was at pains to say the labor market is still in good shape. And besides, the real economic effects of the cut will take a while to kick in. In fact, longer-term bond yields have even ticked up since the decision, suggesting that traders also don’t expect the economy to crater.

The Fed also released its quarterly economic forecast showing policymakers expect a jobless rate of 4.4% by year-end, up from the 4% they projected in June. They expect the annual core inflation rate (personal consumption expenditures index) to land at 2.6% by year-end, lower than the 2.8% they forecasted in June. The latest projections also indicate Fed officials expect their short-term interest rate target to drop to a range of 3.25% to 3.5% by the end of 2025.”

So where are we going the rest of the year with rates? According to the latest data from CME Group’s FedWatch tool, interest-rate futures are still pricing in 75 basis points of cuts before the end of the year as the most likely scenario. This would require another 25 to 50-basis point cut in either November, or December. Which may be optimistic, a lot will determine how the economy digests these recent cuts.

What happened on triple witching day last Friday? It’s the third Friday of September, which is known as a quarterly triple-witching day. It is the day stock options, stock index futures, and stock index options all expire, prompting volatile trading. Adding to the excitement, it was quarterly index rebalancing. Last Friday was the highest volume day since March 17, 2023, according to Dow Jones Market Data. Some 19.8 billion shares traded across the NYSE, Nasdaq, NYSE American, and NYSE Arca exchanges. Roughly 11 billion shares have traded on an average day in 2024. It’s a stunning amount of trading for a day that featured few major economic or earnings reports.

Other economic news? As Market Watch reports, “The number of Americans who applied for unemployment benefits last week fell to the lowest level since mid-May. New claims decreased by 12,000 in the seven days that ended Sept. 14 — to 219,000, the government said Thursday. Economists polled by the Wall Street Journal had forecast new claims to total 229,000, based on seasonally adjusted figures. Claims in the prior week were revised up by 1,000 to 231,000. The number of new claims based on actual filings — that is, before seasonal adjustments — stayed under 200,000 for the sixth week in a row. It’s quite uncommon for actual claims to be that low.”

The housing market? American home sales fell to the lowest level since October 2023, as home buyers held back in the face of high mortgage rates and record-high home prices. Sales of previously-owned homes fell 2.5% to an annual rate of 3.86 million in August, the National Association of Realtors said last Thursday. The median price for an existing home in August rose 3.1% to $416,700, as compared with the year before. That’s the highest price on record for the month of August. The typical home buyer today was facing a tough real-estate market back in July, when they were house hunting. Home prices continued to increase and set new records, while mortgage rates were still elevated at that point. With rates falling in August, the NAR said it believes sales will perform better in future months.

And the market in the coming 4th quarter? Volatility is the operative word, not a downtrend. Investors should now expect a period of consolidation and sideways movement in the S&P 500 as the market exits one group of trades in favor of another. The consolidation could last for months as it takes four to six fiscal quarters for Federal Open Market Committee (FMOC) policy to fully impact the economy. Between now and then, the S&P 500 will likely move within a trading range, with 5,670 as the peak and the bottom as much as 10% lower. Which makes sense after a great year in 2023 and solid gains so far this year.

Mike

PostScript:

As we enter the final month before the upcoming elections, I wanted to encourage all to ignore the noise and do two things, First, do your homework, (visit the campaign websites for specific information on the candidates’ positions in all federal State and local races, (I recently had a conversation with a client who did just that and discovered facts which definitely changed her opinions). Second, please vote! (early or on November 6th Encourage your friends, family, coworkers, and anyone you may have contact with to do the same.

I have clients from all over the political spectrum and deeply value all opinions and discussions, but ultimately, we each must choose the important issues to us personally and vote accordingly. One final point, only once in our US history has the electorate had the benefit of a former President running again against the incumbent, (Grover Cleveland 22nd and 24th a Democrat and Benjiman Harrison 23rd a Republican). As then, we have the benefit of experiencing life under their respective administrations, but now we have much easier access to information.

As an investment advisor rest assured, we will react to what ever happens and do our utmost to protect and grow your assets. But I personally feel this election will determine what we will be as a country, my prayer is, despite the rhetoric, we all have basic American principles we share and return to the days of respectful debate and unity as Americans. Thank you.