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“The stock market is a device for transferring money from the impatient to the patient”
Warren Buffett.
(I know I have used this quote before, but, after the last two weeks it seemed more than appropriate.)
Coming off its worst week of the year, the stock market notched its best week since November 2023. Here are the numbers as we move into FED Meeting Week. The S&P 500 rose 3.98%, Joined by the Dow Jones Industrial Average which advanced 2.6%, Big winner was the Nasdaq which rocketed back 5.78%. Internationally, The FTSE 100 was in a good mood up 1.12% and the MSCI-EAFE added 2,12%. 2-year Treasuries paid 3.58% and the 10-Year final rate was 3.69%. The S&P 500 rose 0.5% last Friday. The Nasdaq Composite rose 0.7% on the day. Both marked their largest weekly percentage gains since November 2023. The Dow Jones Industrial Average rose 0.7% last Friday. The major indexes have wiped out most of their September losses after a brutal start to the month. As Market Watch reported, “All 11 major S&P 500 sectors joined in on the fun today, but utilities, industrials, communication services, and materials led the pack with gains of 0.9% or more. Breadth was also encouraging, as the Invesco S&P 500 Equal Weight ETF rose 1%, beating the traditional market-cap weighted S&P 500. Driving the sudden optimism in markets has been a wave of mostly encouraging data and commentary. Today it was the University of Michigan’s consumer sentiment index, which rose more than expected in September. Forward inflation expectations also dropped to their lowest levels since December 2020.”
On to the Federal Reserve which will meet this week, Barrons’ Nicholas Janinski comments “The debate about the size of the Federal Reserve’s first interest-rate cut is raging ahead of the central bank’s Sept. 17-18 meeting, with futures-market pricing now showing 43% odds of a half-percentage point reduction, up from about 25% just a few days ago, but down from nearly 60% a week earlier. A jumbo half-point cut arguably would allow the Fed to get decisively ahead of further labor-market softening, while a smaller quarter-point adjustment would signal that officials are trying to balance a higher unemployment rate with an inflation rate that remains above the Fed’s 2% annual target. Further commenting, the balance here is that a half-point cut could signal to markets that the Fed is worried about being behind the curve. On the flip side, a quarter-point cut could wind up being too little too late. It’s a delicate balance. That’s why forecasts for the rest of the year and Powell’s press conference on Wednesday will likely drive the market’s reaction, possibly more than the size of the cut itself. However, it shakes out, next week’s stock action is likely to be a lot more volatile.
Who is looking good? U.S. small-cap stocks are beating the S&P 500 in the third quarter, even after being more badly battered than large-cap equities in September. “Broadly, small caps got a lift when the Fed definitively signaled a move to easier policy” at the Jackson Hole Economic Symposium in late August, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview Thursday. “Small caps often do well in a cutting cycle,” but that’s generally more “pronounced” when the Federal Reserve is cutting to combat a recession and investors seek to position for their move out of one, she said. “But we’re not in a recession,” Sonders said. Despite slowing, “the economy is doing pretty well,” she added.
Also, evidence continues to build that international stocks are better bets for future performance than U.S. stocks. Of course, predictions of a resurgence of international stocks have been made for many years now, and but for brief instances, those predictions have been wrong. Non-U.S. stocks have lagged U.S. equities so far this year as well as over each of the past one-, three-, five-, 10- and 15-year periods. But U.S. stock-market dominance won’t continue forever.
Some economic news that matters? As Market Watch reports, A key measure of inflation rose a touch faster than expected in August, potentially derailing the chance the Federal Reserve would make a steeper cut in interest rates next week. The consumer price index rose a mild 0.2% in August, the government said last Wednesday, in line with The Wall Street forecast. Yet a measure of prices that strips out volatile food and energy costs, known as the core rate, rose a somewhat stiffer 0.3%. That was a tick above forecast and matched the biggest increase in five months. The Fed views the core rate as a better predictor of future inflation since food and energy prices can bounce up and down in the short run. The increase in overall inflation, meanwhile, slowed to 2.5% from 2.9% and hit the lowest levels since early 2021. The Fed is aiming to bring the rate of inflation down to 2%.
The labor market? The 12-month increase in the core rate was unchanged at 3.2%.The number of Americans who applied for unemployment benefits last week rose slightly to 230,000, but there was still no sign of widespread layoffs even as the job market cooled. A softening but still stable labor market gives the Federal Reserve the leeway to proceed slowly in lowering interest rates now that inflation has returned to close to low pre-pandemic levels. Speaking of unemployment and the labor market, Boeing employees walked off the job site at Boeing Factories near Seattle on Friday morning after union members voted to go on strike and reject a tentative contract that would have increased wages by 25% over a four-year span. The official walkout started last Thursday, just three hours after the local branch of the International Association of Machinists and Aerospace Workers announced over 94% of voting workers rejected the proposed contract and 96% voted in favor of the work stoppage, going over the two-thirds requirement.
Any news from the housing market? Applications for mortgages inched up as mortgage rates fell for the sixth week in a row. The 30-year fell to the lowest level since February 2023 ahead of a highly anticipated rate cut by the Federal Reserve next week. The drop-in rates pushed the market composite index — a measure of mortgage application volume — up slightly in the past week, according to the Mortgage Bankers Association on Wednesday. Even though rates are at a 19-month low, home-buying activity has barely picked up as people hold back. That’s potentially due to expectations of rates falling even further, or due to uncertainty over the presidential elections, as MarketWatch reported previously. A record share of respondents in a recent Fannie survey expects rates to fall over the next 12 months. However, Housing prices rose at the fastest monthly pace this year in August and were the main contributor to the more stubborn reading on core inflation. The index for shelter, which includes rents and the owners’ equivalent of rent, rose 0.5% month over month in August after a rise of 0.4% in July. Owners’ equivalent rent rose 0.5% from July to August, while rent prices increased 0.4%. Shelter prices, which account for roughly 40% of underlying core inflation, rose 5.2% year over year in August. The increase in shelter inflation accounted for over 70% of the total 12-month increase in core CPI, Bureau of Labor Statistics said.
So, this week will give some definite news on the Federal Reserve’s action, that and the political season heating up should make for an interesting 4th quarter. We still believe 2024 will end on a good note.
Mike
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