Vericrest Insights - September 2024
The sun is setting sooner and the evenings are getting cooler – yes, summer is (unfortunately) coming to a screeching halt.
Along with this change of season comes several other changes, including monetary policy and interest rates and the leader of the free world. Change usually begets volatility. And some of the data released in August subsequently drove the market volatility we experienced, but the strength of the US consumer seems to continue to stay constant – at least for now.
Looking back at August…..after a downturn during the first week, followed by some continued volatility, and then an uptick, the month ended with the S&P 500 finishing modestly higher. Driving that was new data on consumer spending’s continued solid showing, further easing anxieties about an economic slowdown.
Mid-month, U.S. equities rose and interest rates fell after Federal Reserve Chair Powell stated, “the time has come for policy to adjust” – this was the most direct signal yet that the Fed intends to start dropping rates soon. How soon? Read on…..
We kicked off August with a data release that suggested the job market may not be as strong as previous reports had indicated. The U.S. Labor Department reported that actual job growth was nearly 30% lower in the 12-month period through March 2024 – the largest revision since 2009 – although it still represented more than two million jobs created. The current unemployment rate in the United States is 4.3%, which is an increase from 4.1% in the previous month and up from 3.5% a year ago. The rate is seasonally adjusted to account for variations in employment levels throughout the year.
Last Friday’s release of the Personal Consumption Expenditures Index (PCE) showed that both inflation and the economy are slowing, enough to give the Fed cover to start cutting rates in September, but not enough to worry about economic growth. The data added to the sense of reassurance for the economy, as personal spending rose 0.5% in July from a month earlier, up from 0.3% in June – at 2.5% on an annual basis. Overall, it was an encouraging report, as the market continues to look for reasons that consumer spending – and earnings – will continue growing.
So while concerns about an economic downturn have eased for now, the possibility remains. Market participants often spend considerable time trying to predict recessions, recognizing them as an inevitable part of the business cycle. However, the exact timing is notoriously hard to determine. An inverted Treasury yield curve, where short-term interest rates exceed long-term rates, has historically been a reliable indicator of U.S. recessions, though the delay between inversion and a formal recession can be lengthy. The chart below shows the difference between the 10-year and 2-year Treasury yields, with inversions falling below the zero line and recessions highlighted in shaded areas. Since 1990, recessions have generally occurred after the yield curve moves out of inversion. The current inversion, the longest since the early 1980s, persists despite the U.S. economy's resilience amid sharp post-pandemic inflation and the Federal Reserve's aggressive rate hikes. The past four U.S. recessions, varying in duration, have typically begun one to two quarters after the yield curve normalizes. This detail is crucial to consider as the Fed begins its easing cycle.
The net of all recent data: labor demand has softened, unemployment has risen, while spending has remained strong, making for an "odd combination of rising concerns about a US slide into recession alongside financial market optimism about the future path of business sector performance," JPMorgan said in a note last week.
So it looks as though the Fed may actually “stick the landing” after all, a term I’m sure you’ve heard before – especially if you regularly read our publication. A soft landing refers to the Fed’s ability to lift interest rates to tame inflation without putting the economy into recession. And you’ll remember this whole thing began when the Fed raised the federal-funds rate from 0% in 2022 to just over 5% now, with their main goal of cooling down the economy just enough to reduce inflation but yet not drive unemployment significantly higher. Along the way, investors feared recession – but instead the economy has continued to grow, at a more moderate pace.
Looking ahead, the next Federal Open Market Committee (FOMC) meeting will be held on September 17-18, 2024, at which point it is expected that they will cut interest rates for the first time since 2020. Analysts are looking for a modest cut for now. The importance of what comes out of this meeting cannot be understated, and will potentially steer the market through the election cycle and into the year-end.
I’d like to end with a quote by Peter Lynch, one of the most successful and well-known investors of all time. Lynch is the legendary former manager of the Magellan Fund at the major investment brokerage Fidelity: “The strength of our economy is that it is dynamic and always adapting to changing conditions.”
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For Further Reading
Below are a few articles that I’ve found relevant and informative, one of them about another well-know and well-quoted investor, Warren Buffett. Please take a look….
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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.