October 1st, 2024
After a year of patience, the Federal Reserve (Fed) has finally pressed their economic gas pedal to the floorboard by cutting 50-basis-points (0.5%) all at once. A sigh of relief for many investors, business owners, lenders, etc.
The consensus had shifted over the past year from expecting gradual cuts in early 2024, to the need for a larger, and more immediate, response in September. Typically, rate cuts come 25-basis-points at a time. In this instance, the Fed doubled down by doing two at once to incite a burst of economic activity. The Fed’s decision reflects a notable pivot towards a more favorable economic outlook.
Throughout this year, concerns lingered about the potential impact of high interest rates on corporate profits and GDP growth. Fed President Jerome Powell stated that the combination of inflation running “much closer” to the 2% target and “less tight” labor conditions made the larger 50-basis-point cut appropriate. Overall, Powell’s tone was extremely upbeat on the economy, and the decision to cut 50-basis points was a near-unanimous decision with only one dissenting vote.
In past rate cut cycles, the Fed often had a crisis to deal with causing them to plunge rates quickly. This time, the Fed is acting from a position of strength and looking to help the jobs picture before the economy starts pumping the brakes.
What does this mean for the markets?
As we look ahead, the outlook for the economy and markets remains encouraging. The S&P 500 has already experienced notable gains this year, climbing 20% since its start. The current strength of our GDP growth rate at 3.0% in Q2 2024 (expectations for Q3 nudging even higher), coupled with Wall Street projecting a robust 15.3% growth in S&P earnings per share for 2025 all present a strong backdrop for the Fed who is poised for further rate cuts. We *could* be on the cusp of yet another growth cycle.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: Stocks advance to new highs in anticipation of continued progress on inflation and expectations of further easing from the Fed for the remainder of the year. The S&P 500 added 2.26% while the Nasdaq Composite grew 3.06% and Dow Jones Industrial Average gained 2.03% for the month.
Economic Update
Fed Cuts 50 Basis Points: Going into the September Federal Open Market Committee meeting, odds were slightly in favor of a 50-basis point cut, which the Fed delivered. In his remarks, Fed President Jerome Powell stated that combination of inflation running “much closer” to the 2% target and “less tight” labor conditions made the larger, 50-basis-point cut appropriate. Overall, Powell’s tone was extremely upbeat on the economy, and the decision to cut 50-basis points was near-unanimous with only one dissenting vote.
Inflation Data Continues to Improve: Mid-month, Consumer (CPI) and Producer (PPI) inflation data kept the soft-landing narrative alive, with CPI coming in as anticipated at 0.2% monthly and 2.5% year on year. Core CPI (excluding food and energy) was slightly hot due to sticky shelter and transportation costs, up 0.3% for the month and 3.2% annually. PPI fell to 1.7% annually. At the end of the month, the Fed’s preferred inflation measure, Core Personal Consumption Expenditures (PCE), was released and showed inflation continues to make progress towards the 2% target, albeit slowly. Monthly Core and Headline PCE were both 0.1%, translating to annual rates of 2.7% and 2.2%, respectively. Annualizing the last 3-months of Core PCE data shows that more recent inflation data has now been trending at the 2% level for the second consecutive month.
Charts of the Month
China Vs India
Our first chart is a 5-year view of the two largest Emerging Market countries, China (iShares China ETF, ticker MCHI, blue line) and India (iShares India ETF, ticker INDA, red line). In 2020, Chinese stocks made up nearly half of Emerging Market index market capitalization at 43% while India was just 8%. But since then, China has severely underperformed globally and now represents just 24% of the index, while India has capitalized on China’s weakness to grow to over 20% of the EM market cap. With China looking increasingly weak economically, continued growth from the Indian market will be crucial for diversified investors with EM exposure. That said, China’s recent stimulus has already result in a spike in values, however, it remains to be seen how quickly China can change the current course of their dwindling economy.
Source: AllOneWealth via tradingview.com
Fed’s Dot Plot
Our next chart is the latest Federal Reserve Summary of Interest Rate Projections, commonly referred to as the “Dot Plot”. The latest Dot Plot shows a year-end target of 4.25-4.50%, which implies 50 additional basis points (.5%) in cuts for the remainder of the year. It is likely that the Fed’s initial 50-basis point cut was supersized to make up for the Fed’s disappointing decision to hold steady in July, and subsequent cuts will be 25-basis points each.
Core PCE
Our next chart shows the Core PCE Index, measuring inflation (ex-food and energy) by annualizing three-, six-, and twelve-month data. While Core PCE is still running at 2.7% annually, the shorter-term measures show that the recent trend is quickly approaching the 2% target. Barring a surprise uptick in monthly inflation data, the annual rate should fall in the first quarter of 2025 as the hot data points from January-March fall off the calculation. The Fed has noted on numerous occasions that the 3–6-month trend is the best indicator of actual inflation, so this data makes the case for more aggressive rate cuts.
ETF Holdings Review
Our final chart is a look at our top ETF holdings and their performance over the past 18-months. As with any good strategy, diversification is at the corner stone of what we do. These funds aid us in capturing different segments of the market, at different times, broadening our exposure to minimize risk and maximize returns. These funds compliment our individual security and individual bond selection. As no surprise to anyone, the Semiconductor ETF (ticker SMH, pink line) has substantially out performed everything during the period – a wonderful compliment to our portfolios which was added in the wake of the CHIPS Act and the AI investment wave. Small-cap ETF (Ticker: ESML) has been the laggard of the bunch as the high interest rate environment has put downward pressure on these stocks, however, this should change as the rate environment continues to improve – this has been a more recent addition to our portfolios for hopes of outperformance with a lower rate environment.
Ticker: CVLC – Large Cap Core US (Socially Responsible) ETF, blue line
Ticker: QQQ – Nasdaq Index ETF, magenta line
Ticker: ESML – Russel 2000 Small-Cap ETF, purple line
Ticker: SMH – Semiconductor Index ETF, pink line
Ticker: IDU – Utility Index ETF, green line
Ticker: CVMC – Mid-Cap Index ETF (Socially Responsible) ETF, orange line
Source: AllOneWealth via tradingview.com
