September 4, 2024
Market Monitor: August Update
Headlines and Highlights
- Fed chief signals imminent rate cuts: Federal Reserve Chair Jerome Powell all but assured that the central bank will lower interest rates at its September 18th meeting, with inflation tamed and the job market cooling. Powell confirmed in a speech at Jackson Hole, Wyoming, that “The time has come for policy to adjust.” He said whether the Fed reduces its benchmark rate – now at a 23-year high of 5.25% – by a quarter- or half-percentage-point this month is yet to be determined, as is the pace of future cuts. The Fed’s favorite inflation gauge subsequently showed yearly inflation at 2.5% and core inflation at 2.6% in July, unchanged from June.
- Economy remains on firm ground despite pressures: The outlook for U.S. growth remains positive despite a softening labor market, manufacturing slowdown and elevated lending rates, the latest reports show. Third-quarter GDP is on track to grow at a 2.1% annual pace, according to the Atlanta Fed, after second-quarter growth was revised upward by the government to a robust 3.0%. Consumer spending accelerated in July on a better-than-expected 1% rise in retail sales. And with second-quarter earnings nearly complete, S&P 500 companies reported a double-digit jump in profits over the prior year and maintained their outlook for record earnings in the third and fourth quarters.
- Turbulent month ends on upswing: Most financial markets ended an initially rocky August with gains as key U.S. economic indicators improved following a drop that temporarily heightened recession concerns. The rebound left the Standard & Poor’s 500 just shy of its all-time high after a 2.4% advance that pushed its 2024 total return to 19.4%. Small-cap stocks recovered most but not all (-1.7%) of their early-month loss. International stocks (3.3%) and U.S. REITs (5.3%) outperformed. Taxable (1.4%) and municipal (0.8%) bonds also rose as yields fell in anticipation of lower rates. Bond prices move inversely to interest rates and bond yields.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- We expect the Fed to lower rates by a quarter-percentage-point this month and make similar-sized cuts in subsequent meetings, dropping the benchmark rate to at least 4.5% by year-end. The economic data does not yet justify a larger initial cut of half a percentage point, although that could change if this Friday’s monthly employment report shows the labor market weakening to an unexpected extent.
- Inflation is no longer a major threat to the economy, even though it lingers slightly above the long-term average. Core PCE inflation has dropped to just a 1.7% annualized rate in the past three months, suggesting the cooling trend is strengthening.
- The job market, while remaining solid, is now the most vulnerable part of the economy and the Fed’s primary focus, as Powell suggested when he said the central bank does not “seek or welcome further cooling in labor market conditions.” We have concerns about nationwide job openings having fallen to a more than three-year low this summer. But the amount of weekly initial jobless claims – a reflection of layoffs – has leveled off in recent weeks in evidence the market remains stable.
- The stock market’s recent broadening increases the likelihood of further gains in the index by year-end. Propelled by strong earnings reports from the broad spectrum of U.S. companies, the S&P 500 continued rising in July and August despite back-to-back losing months for a majority of the Magnificent 7 tech stocks that have dominated the market.
- A tightened presidential race has added uncertainty for markets but has not altered the positive dynamic that shows stocks usually rising regardless who gains the White House. The wild card for investors is the potential for a sweep by either party of the presidency and both houses of Congress, which could have significant implications for changes in tax policy. This outcome, while not probable, remains possible for either Democrats or Republicans and we are tracking it closely.
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