Vericrest Insights - October 2024

September was a very busy month. Stock prices continued to break records, gas prices continued to fall, and the Fed began cutting interest rates. And October already looks to be continuing the eventful trend, only two days in. Geopolitical shifts, continued unrest in the Middle East, devastating hurricane and its aftermath, monetary stimulus in China, and all the political ads you can stand….and then some more….and more after that.

Two weeks ago, the Federal Reserve reduced interest rates for the first time since the pandemic, signaling the end of – or at least an interlude in – the post-pandemic inflation. Everyone expected a rate cut was coming. The FOMC opted for a 50bps cut versus 25 in an 11-1 vote and indicated another 50bps would be likely by the end of the year. Fed Chair Jerome Powell said the U.S. economy remained strong and that the central bank would decide on the appropriate pace of future rate cuts. And major stock indexes – the S&P 500 and the DJIA (Dow Jones Industrial Average) both responded with record highs. The small-cap Russell 2000 index (IJR), rose 2.1% as lower interest rates boosted prospects of reduced operating costs and greater profits for both these small-cap companies as well as the mid-cap companies represented in the S&P mid-cap index (IJH).

A few other September highlights and economic data points:

·??????? In the U.S., large cap stocks (S&P 500) rose by 2.2%.

·??????? Outside the U.S., foreign developed stocks (MSCI EAFE) rose by 1.1% while emerging stocks (MSCI Emerging) rose by 5.4%.

·??????? In the fixed income market, high grade bonds (US Aggregate) rose by 1.3% while high yield bonds rose by 1.7%.

·??????? The 10 Year Treasury Yield is at 3.8% which is -0.1% lower than the prior month and -0.1% lower than the prior year-end.

·??????? A sharply lower consumer confidence reading reflected Americans’ growing concerns about a cooling jobs market. While weekly jobless claims remained low at 218k, the ratio of respondents that viewed jobs as “plentiful” versus “hard to get” was the lowest since March 2021.

·??????? The housing market saw modest improvement in pending home sales as buyers anticipated lower mortgage rates, but new home sales were still hampered by record prices and an inventory shortage.

·??????? The latest CPI (Consumer Price Index) numbers show that inflation dropped to 2.5% in August, down from the mid-2022 peak of 9.1%, and the lowest reading since 2021. Keep in mind that this reduction doesn’t necessarily mean that prices are dropping, but that they’re not rising as quickly.

?To the last point above, what exactly does “2.5% year-over-year inflation” really mean? Our friends over at Chartr zoomed out on the bigger picture to explore exactly where prices have risen and fallen the most over the last 4 years with this chart:?

As I looked at this list, I noticed that about half of the items are “essentials” and have what economists call “inelastic demand” which means that consumers' buying habits remain relatively unchanged even when prices change: shelter, energy, car insurance, food at home. The other items (airline tickets, rental cars, food away from home, admission to sporting events) are considered "elastic" meaning their demand is highly responsive to price changes.(Truth be told: I was stuck with where to categorize alcohol….)

?The question is if the nature of this inflation we’ve been experiencing is “transitory” or not. I do know that inflation compounds over time, the effect is exponential, and will be felt for years.

So what happens next?

The biggest concern for the Fed right now – and, in turn, all of us consumers – is if widespread inflation will rear its ugly head once again, as the interest rates fall.

How far and how fast will the Fed continue to cut interest rates? ?Well, they do now have some wiggle room to keep adjusting interest rates down, with expectations of significant cuts by mid-next year, potentially falling to somewhere near 3.5% by the middle of 2025 and closer to the long-term average rate.

Since 1929, the Fed has embarked on 14 rate cut cycles. These cycles often follow periods of economic tightening and can be used to mitigate economic downturns. These 14 interest rate cycles hardly constitute a statistically significant sample size, however, the data is compelling: 86% of the time, the S&P 500 Index posted positive returns 12 months after the initial rate cut. The two negative periods—which occurred after the Fed began cutting rates in 2001 and in 2007—may feel all-too-recent, but neither economic environment resembles today's; the former happened amid the dot-com implosion, and the latter was precipitated by the subprime mortgage crisis.

And so, the commencement of the Fed rate cuts marks the beginning of an expected shift in markets. Yes, as mentioned above, investments such as stocks and corporate bonds have tended to perform well in the 12 months after the Fed begins to cut rates. However, there is still a fair amount of uncertainty ahead with the rate cut(s) and the upcoming presidential election, not to mention rising tensions around the globe. In times like these, it's best to continue to stay invested, stay diversified and stay the course on your long-term financial plan.

(Here is an article that I’ve found interesting and helpful to explain where we are historically in the interest rate cut cycle: https://www.wsj.com/finance/investing/heres-what-happens-to-markets-when-interest-rates-fall-in-charts-8b2b4cea?st=4BDN7f&reflink=desktopwebshare_permalink)

In our portfolios, we have been slowly reducing our holding of floating rates notes (and will continue to do so) in our fixed income investments, as we are finding better risk-adjusted returns in other segments of the fixed income markets, such as our holdings in U.S. core bonds (AGG) and high grade corporate bonds (LQD).

We continue to hold the lion’s share of our equity investments in U.S. large cap segment – and it continues to “even out” its performance. While the technology and communication services sectors have continued to lead, other sectors such as consumer discretionary have also shown strong growth. This diversification has helped balance the returns, with sectors like healthcare and real estate lagging. Overall, market breadth has improved, and earnings growth has spread across various industries, signaling a healthier, more even distribution of gains beyond the high-flying tech giants.

#CFP #financialplanning #feeonlyadvisor #vericrestinsights

Bill Davis is a CERTIFIED FINANCIAL PLANNER? and Managing Partner with Vericrest Private Wealth LLC, a financial advisory firm in Newtown, Pennsylvania.

Vericrest Private Wealth LLC ("Vericrest") is an SEC registered investment advisory firm. The information provided herein should not be?construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or investment advisory service.?Past performance is no guarantee of future results, and there is no guarantee that future investments will be profitable. While we believe that third party information provided is accurate, Vericrest does not guarantee or otherwise warrant such information.?For more information please contact Vericrest or refer to the Investment Adviser Public Disclosure website?(www.adviserinfo.sec.gov) to review important disclosures about our firm.