HWM Market Recap - October 2024
|
In September, the Federal Reserve (Fed) cut interest rates for the first time since March 2020 by 0.5%. For now, the expectation from both the Fed and investors is that the Fed will continue to cut rates in the coming months.
As of the end of September, the highest probability is two more rate cuts in 2024 (a total reduction of 0.75% over the Fed's last two meetings this year), with additional cuts possible in early 2025. The table below shows the current probabilities of the federal funds rate for the next nine Federal Open Market Committee (FOMC) meetings, the last one being 10/29/2025. The market consensus from here is that short-term rates will continue to decline into next summer by approximately 2% and stabilize at those levels.
Data as of 9/30/2024. Source: CME FedWatch. Chart designed by Avantis Investors.
While we generally steer clear of forecasting, we thought we would share the current market expectations. In doing so, we must stress that these may or may not represent reality. However, while we cannot predict the future, we can look to the past to illuminate the path forward.
Since 1929, the Fed has gone through 14 rate-cutting cycles, nine of which have occurred since 1990. When we observe those latter nine periods in the table below, we see that some have quite different characteristics than others. For example, the number of rate cuts has ranged from two to eighteen, whereas the size of the first rate cut has been consistent across rate cycles at either 0.25% or 0.50%.
Source: Michael Adams, "Federal Funds Rate History 1990 to 2024," Forbes, September 18, 2024. Chart designed by Avantis Investors.
The Fed decreased rates by less than 1% in four of the nine periods. In the other five, the average rate change from the first to the last rate cut was more than 3%. Moreover, a cumulative cut of at least 1% occurred within six months in each of the five cases. As we can see, rate cuts can vary widely depending on the economic circumstances.
Source: Michael Adams, "Federal Funds Rate History 1990 to 2024," Forbes, September 18, 2024. Chart designed by Avantis Investors.
But how has the market performed during previous rate-cutting cycles? Of the 14 cycles since 1929, twelve (almost 86%) have resulted in positive returns in the S&P 500 one year after the first rate cut. The two cycles that created negative returns were the Dot-com Bubble of 2001 and the Subprime Mortgage Crisis in 2007-2008.
Source: Charles Schwab, Bloomberg, and the Federal Reserve. Data from 08/09/1929 through 07/31/2020.
So, will this time be positive or negative? We will have to wait and see. We think it is fair to say that today's market environment does not reflect either of the two negative instances above. Since the 2020s began, there has been an expectation that the economy is doomed for a recession. The truth is that recessions are inevitable – for those of us who have been investing long enough, we know that this is simply the nature of the economic cycle. However, history shows that getting your risk levels right and staying patient through both good and bad times tends to pay off for investors in the long run.
Beyond the Fed, we will be keeping an eye on the economy. A resilient economy is good for the stock market, and the Fed's focus on fighting inflation could keep it under control. Consumer sentiment is another key factor. For a soft landing to be successful, consumers must believe it to be true and have the confidence to increase spending.
Lastly, with the election less than a month away, we want to remind investors that, while elections have consequences, it is not wise to let politics have short-term influences on our portfolios. It is easy to be tempted, but as we wrote in our July Newsletter, politics has far less control over the stock market in the long term than is commonly believed:
...As investors, we put our money and faith in companies that focus on serving their customers and growing their businesses, regardless of who is in the White House. Moreover, the stock market is not a reflection of who is president but of American ingenuity – those companies creating products and services to solve problems, improving efficiency, and looking at old ideas in new ways.
As the market marches higher, many investors grow concerned that new highs are not sustainable. Oftentimes, investors can be pessimistic about the short term but optimistic about the long term. This is a perfectly rational stance. However, it is during times of uncertainty that it is important to have a consistent approach to investing while staying committed to your long-term plan.
|
Monthly Changes in Indices
| Year-to-Date Changes in Indices
|
Monthly Performance By Sector
| Year-to-Date Sector Performance
|
|
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE), increased by 2.2% in August compared to one year ago. Core PCE, which excludes food and energy, was up to 2.7% annually. The Consumer Price Index (CPI) increased by 0.2% month-over-month, the same increase as in July. Over the last 12 months, CPI increased by 2.5%. Core CPI rose 0.3% between July and August and by 3.2% annually.
The Bureau of Labor Statistics’s Job Openings and Labor Turnover Summary showed that job openings, hires, and separations remained more or less the same since July. The broader Employment Situation Summary showed that the U.S. economy added 254,000 new jobs in September and had an incremental reduction in the unemployment rate – now at 4.1%.
Sales of new single-family homes fell 4.7% month-over-month in August but is 9.8% above the August 2023 estimate. The median sales price for new houses sold in August 2024 was $420,600; by comparison, the average sales price was $492,700. Meanwhile, existing home sales decreased by 2.5% in August month-over-month and fell by 4.2% from one year ago. The median existing-home sales price rose 3.1% from August 2023, representing the 14th consecutive month of year-over-year price increases.
Consumer sentiment improved in all components in September. As Surveys of Consumers Director Joanne Hsu writes, “While sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow.”
According to the U.S. Bureau of Economic Analysis, real (inflation-adjusted) GDP increased by 3% annually in the second quarter of 2024.
If you liked this post, please share it with someone who might benefit from it, and let us know if you have any comments or questions!
About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Any charts and graphs provided are hypothetical and for illustrative purposes only, are not indicative of any investment, and assume reinvestment of income and no transaction costs or taxes.