MARKET INSIGHTS SEPTEMBER 2024
The summer has, sort of, officially ended with Labor Day in the rearview mirror. The temperature was a brisk 57 degrees when I left the house this morning to head to the gym. The chill in the air made me think about the various “chills” in the market and the economy. The S&P 500 was quite volatile during the month but it churned out a return of +2.4% [1]. As I write this note this morning, the S&P is up over 17% for the year[1]. Growth stocks, as measured by the Bloomberg 1000 Growth Index, returned 2.3% for the month, while The Bloomberg 1000 Value Index was up 2.3% in the month of August.
The bond market has been watching the Fed to see when and how much they will reduce the Federal Funds rate. July ended with the 10-year Treasury note yielding 4.03% and ended August at 3.90%, and this has edged down to 3.83% at 10:00 AM on September 3rd1. Within the economy, inflation has slowed with headline inflation rising 2.9% year over year in July, and when food and energy are factored out, inflation rose by 3.2% on a trailing year basis. The Fed’s favored inflation gauge remains the Personal Consumption Expenditures Index and that rose by 2.6% during the same period[1]. Oil is down over $7 per barrel from the end of July though today and this is part of what has been driving inflation lower [1].
The Fed has indicated that they see inflationary pressures as being reduced, allowing them to focus on the employment market. The last reading of unemployment was 4.3% and underemployment has crept up to 7.8% [1]. At the same time, job creation has been slowing and there have been numerous articles written about the change in the employment market as there has been less high-paying tech jobs and more lower-paying healthcare positions. We are acutely interested in the change in the structure of the employment market because fewer high-paying jobs can have a negative impact on wages and thus aggregate spending. I have been out of college for well over thirty years and I remember reading an article about staying in shape because when people are in college, they are likely more physically active than the sedentary office job they may take on after graduation. At first, your clothes still fit the same even though your slower lifestyle is likely changing your body’s ratio of lean muscle to fat. I am concerned that this is precisely what is occurring in the economy and by the time you realize you need to let your belt out a notch, the damage is done!
The Fed appears to be on a course to cut rates at least once, if not twice this year. The most aggressive pundits have the Fed reducing inflation by 100 basis points. We still believe that two 50 basis point rate cuts may be aggressive because the Fed does not want to cut interest rates only to see inflation rise again. This Fed cycle also appears to be different than past election years. Traditionally, the Fed has stayed away from changes in monetary policy leading up to a Presidential election because they did not want to be seen as influencing the outcome of the election. In no way do I think that the Fed is attempting to influence the 2024 election, but I do think the Fed is going to act and likely act this month. The twin mandate of the Fed is to manage inflation and to keep the economy at full employment. The aggressive nature of the Fed hiking program was solely focused on reducing inflation. I will not rehash that the Fed was late to this game because of their insistence that this bout of inflation was transitory. It clearly was not. Now that the Fed feels that inflation is under control, they are turning their attention to the employment market. As there certainly has been some erosion in employment, we expect the Fed to act to help keep the employment market healthy.
We are two months away from the Presidential election and early voting has started. I will leave the jokes about ballot harvesting to others. I will not breathlessly state that this is the most consequential election of our lifetime or that one candidate is an “existential” threat to democracy. I will say that the country remains incredibly divided, and we are fighting for the key point of what America will be in the future. Are we going to continue to expand the social safety net in all ways and reduce the incentive for innovation or hard work? Are we going to focus on being the republic we were created to be and limit the size and scope of the Federal government? The winner of this election is going to need to reach both sides in a serious way. Vice President Harris seems to be trying to move to the center, however, there is little in her past that indicates that this is where she will really want to govern from if elected. Former President Trump is trying to make this election about more than abortion, but he is fighting the mainstream media and the Democrats. As I wrote in a blog post recently, the chief product of this election will be volatility and we will continue to see the ebb and flow of markets up to and through Election Day.
At KOCAA we constantly preach about assessing your investment goals, and your time horizon and to vigilantly rebalance your portfolio. In volatile times, a reassessment and realizing gains are always strategies worth consideration. Please know we are here to discuss these matters with you.
