Investment Outlook, September 2024
September 26, 2024
This past week, the Federal Reserve cut interest rates by 0.50%. This was the first reduction in the Federal Funds rate since it hit a peak in July 2023 of 5.25%-5.50%, the highest in 23 years. In recent weeks, economists and investors alike debated whether the Fed would cut by 25 or 50 bps, but the size of the move did not matter. What matters is that the Federal Reserve finally acknowledges that inflation has stabilized and conditions no longer warrant such a restrictive level of interest rates. While much is still uncertain for the remainder of the year, including potentially softening economic conditions, our Presidential election, and global stresses, we generally expect rates to slowly and continually decline from here, supporting continued market strength into year-end.
For the better part of four years, inflation concerns have outweighed growth concerns for market participants. Headline CPI is now back at levels last seen in early 2021, led by disinflation and deflation in persistent problem areas such as food, energy, used cars, and airfares. As price increases continue to slow, investors’ focus has shifted back to growth. However, mixed data is clouding the picture, making it difficult for the market to look forward, resulting in the elevated volatility seen throughout this quarter.
From our vantage point, we see an economy that’s slowing but not weak. Over the past four quarters, the U.S. economy has averaged over 3% real GDP growth – well above the 2% average that we experienced over the past decade. Retail sales, which predominantly reflect goods spending in the economy, have shown continued momentum even as we see an increasing share of consumer spending on services. Wage growth, while slowing, has been outpacing inflation since the end of 2022, boosting disposable incomes. And oil prices are nearing pre-Ukraine invasion levels, shrugging off current Middle East tensions, which should benefit consumer budgets and support further spending going forward.
Despite the consumer strength, the unemployment rate has ticked up over the past several months, from 3.7% at the start of the year to 4.2%. Payrolls data also shows signs of a slowdown in hiring across all sectors of the economy. While this is raising recessionary alarms in some corners, we see higher unemployment due to reduced hiring by companies and an expanding pool of available workers, not from increased layoffs. The total number of people employed in the U.S. sits near highs seen prior to the pandemic. This signals to us an economy that’s growing but perhaps not growing fast enough to absorb the higher labor participation.
Now that our Fed is joining central banks worldwide in easing policy through regular rate cuts, we should see a stabilization in growth closer to long-run averages. Monetary policy does operate with a lag, which means we may not see the beneficial effects of rate cuts for several more quarters. However, the Powell Fed has been more communicative and transparent with the public than previous leaderships, which may reduce the lag effects relative to history. And given our current level of rates, the Fed has ample room to cut in response to weaker-than-anticipated data, further supporting the economy and markets.
Given our view of the current macro backdrop, we remain optimistic about the path of equities going forward. This past quarter, large technology companies continued to perform well, but we also saw the broadening of the market that we have been anticipating. Financials, industrials and steady healthcare all contributed to your portfolio’s performance. As the U.S. presidential election draws closer, we may continue to see stock volatility as the market digests potential policy impacts. However, regardless of which party controls the executive branch, history suggests that the market tends to move higher after the election and into year-end, then adjusts to anticipated policy. We’ve positioned portfolios to take advantage of an economy headed for a soft landing while staying mindful of risks to growth.
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