September 5th, 2024
When the Federal Reserve (Fed) paused rate hikes a little over a year ago the consensus was that rate cuts would likely begin to occur sometime in early 2024, but no later than the end of the second quarter of this year. However, the Fed has repeatedly postponed rate cuts due to sticky inflation data.
The narrative among economic and market pundits has been that the high interest rate environment we’ve been enduring could negatively affect corporate profits, contracting GDP, and push the economy into a recession. Fortunately, this fear has not come to fruition and, at this point, likely won’t. The trend of strong corporate earnings has not diminished, and now inflation data has begun falling within the Fed’s ‘normal’ range.
The Fed’s preferred inflation metric, Core Personal Consumption Expenditure (Core PCE) index, is now holding steady at 2.6% annually. While 2.6% is above the Fed’s 2.0% target, the quarterly trend shows inflation running lower, with the three-month annualized Core PCE reading at 1.7% – well within the Fed’s ideal range.
With the economy remaining relatively strong and inflation seemingly finding its way into good order, it appears the Fed has found its stride and will deliver us a- mostly- soft landing. That said, rate cuts appear to be a near certainty with the Fed projected to cut at least 25-basis points (0.25%) in September.
What we should anticipate from the market
Markets have performed quite well this year and last. Although, last year’s gains were really just a recovery from 2022’s contraction (loss).
Image Source: AllOneWealth
That said, the S&P 500 has grown over 16% since the first trading day of this year (and since surpassing its previous high at the end of 2021). With the Fed poised to lower rates, this growth may just be the beginning of our next growth cycle.
One could argue that some of the $6.15 trillion currently parked in money market funds will soon flow into stocks with the prospect of a lower rate environment – which would result in a low cost of debt and a less restrictive economic landscape for the many market laggards. This injection of cash into markets should result in positive market breadth – the broadening out of growth among said market laggards.
Thus far in the reporting of second quarter earnings, 93% of S&P 500 companies have reported and 79% of companies have beaten earnings per share (EPS) forecasts. Forecasting 2025, Wall Street analysts are projecting EPS growth of 15.3% per FactSet, while Standard & Poors’ projections are even more optimistic at 16.3% EPS growth. While the top 10 stocks in the S&P 500 encompass roughly 36% of the market share, they contributed under 25% of the earnings, so there is still value in the neglected aspects of the market.
Image Source: Morgan Stanley
Furthermore, using S&P’s 2025 EPS forecast puts S&P 500 at a 19.6 forward P/E multiple, the lowest since 2022, and close to the five-year average of 19.4. Considering that the five-year average period encompasses the pandemic, when economic fears were at extreme levels, the S&P 500 looks relatively attractive trading at 19.6 times forward earnings amidst the backdrop of low recession risk and an increasingly accommodating Fed. With recession barely on the radar and rarely mentioned in recent earnings calls, a broadening market rally appears to be in alignment.
Image Source: Factset
There is, of course, inherent risk in investing. Yet looking at the current market landscape – the prospect of rate cuts, over $6 trillion in money market liquidity and the potential wild card that is artificial intelligence and the advantages/efficiencies it will unlock for the economy – there is much to remain positive about in the coming months/years.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: August was a wild month for stocks. The S&P 500 was down more than 8% prior to the Fed’s announcement of incoming rate cuts. Once announced the market bounced back sharply with the S&P 500 ended the month up 1.55%, the Nasdaq finished the month flat with a 0.15% gain, while the Dow Jones was the leader in the major indexes with a gain of 1.63%. Small cap index Russel 200o fell -1.65% during monthly trading. Foreign developed markets out performed with a 4.07% increase, while Emerging markets grew 1.47%.
Economic Update
Jackson Hole Symposium: The Federal Reserve’s annual Economic Symposium occurred mid-month, with Chairman Powell’s much-awaited speech being the highlight. A year ago, Chairman Powell’s speech rattled markets and triggered a selloff that endured until November 2023, but this year’s speech elicited a much more pleasant reaction from markets. Powell signaled rate cuts will start in September, but didn’t give any indication whether the initial cut would be 25 or 50 basis points. Market pundits are pushing policy makers to cut 50, however, if Chairman Powell’s past actions are any indication of his future actions, it seems clear he’ll keep the cut to 25 basis points (0.25%) for September.
Jobs Revision: The Bureau of Labor Statistics issued its preliminary annual benchmark review of employment data, revising jobs growth for the annual period ended March 2024 down by 818,000 jobs. Economists were anticipating a revision between 500,000 and 1 million jobs, making the report roughly in line with estimates. The Federal Reserve minutes from the July policy meeting revealed that the Fed was anticipating a negative jobs revision, so the path of rate cuts likely will not be significantly impacted by the updated data.
Charts of the Month
Nasdaq Vs Dow Jones
Our first chart is a three-month view of the Nasdaq Composite (blue line) and the Dow Jones Industrial Average (red line). Growth-oriented Nasdaq stocks have dominated the headlines all year as excitement over artificial intelligence (AI) has created an arms race among chipmakers and tech companies seeking to build out their AI data-centers. Yet in recent months, the “boring” part of the market has begun to lead. This is most likely a normal rotation as investors re-weight their holdings and take some profits off the table, rather than a de-risking due to recession fears, considering the strength of the US economy. Investors should now look for further broadening out beyond large caps and into small and medium-sized stocks, which would be a bullish setup for a year-end rally.
Source: AllOneWealth via tradingview.com
S&P 500 Vs Real Estate
Our next chart is a three-month view of the S&P 500 (SPY, blue line) and the SPDR Real Estate Sector ETF (XLRE, red line). As the market has gained confidence that rates cuts will start in September, REITs have been the biggest beneficiaries, outperforming the broader market. The rally in REITs could have even further to run, considering Real Estate has been the worst performing sector over the last three years.
Source: AllOneWealth via tradingview.com
S&P Fibonacci Extension
Fibonacci extension levels often help traders predict growth patterns. When observing this technical indicator for the S&P 500, it appears the index has passed the 1.618 level (price level approximately 5,479.5). If held, this level will act as support for future price action. With the prospect of rate cuts, $6 trillion in cash on the sidelines and the projection of 16%+ in EPS growth in 2025, our next growth level will be at the 2.618 Fib (price level approximately 6,646) a 20%+ return over current levels. *Note, this indicator makes no prediction of duration.
Source: AllOneWealth via tradingview.com
Nasdaq Fibonacci Extension
Fibonacci extension levels, as exhibited and explained above, provide insight into growth patters. The Nasdaq has some work to do as you can see. After being the golden index for market participants since the beginning of 2023, it’s found resistance in its 1.618 level (price level approximately 20,198). This more likely to do with a broadening out of market breadth as investor seek to take profit from the index and mega caps while rotating capital into other segments of the market – including small and mid-cap – rather than a systemic shift toward economic/market degradation.
Source: AllOneWealth via tradingview.com
