September 2024 Market Insights
BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Stock prices moved higher and bond yields moved lower in anticipation of the first rate cut from the Federal Reserve in over four years. The S&P 500 hit another new high after the Federal Reserve announced a 0.50% interest rate cut.
Federal Reserve:
The question in our last Insights was not whether the Fed would cut in September, but by how much. The Fed stopped raising rates in July of 2023 when unemployment was 3.5% and headline inflation (Core PCE) was 3.7%, compared to recent readings of 4.2% unemployment and 2.6% inflation. Now that the Fed feels inflation is under control, its focus has shifted to supporting jobs and economic growth. It takes several months, or even quarters, for the effects of interest rate policy changes to show up in economic readings. With a slowing job market in mind, the Fed felt starting this cycle with a 0.50% cut was the best way to demonstrate their desire to not fall behind. The market expects the next Fed meetings on November 7th and December 18th to result in 0.25% cuts, which would put the Fed Funds rate at 4.33% by year-end.
Bonds:
Interest rates continued to fall over the past month, reaching the lowest level in over a year. Yields on 2-year Treasury bonds were recently 3.6%, 5-year bonds 3.5%, and 10-year bonds 3.7%. Investment grade corporate bonds are yielding around 4.5% across short and medium maturities. As bond yields fell, bond prices rose, increasing total returns. Recent 1-year returns on bonds in client portfolios have been much higher than the 3.5-4.5% current yields, so more modest bond returns are likely in the years ahead compared to the past 12 months. We expect purchased money market rates to fall in the coming weeks to be around 4.5%, and we expect those rates to fall to 4% by year-end if the Fed enacts two more 0.25% cuts. Lastly, it has been over two years since 30-year mortgage rates were lower than the recent level of 6.1%.
Economy:
Inflation readings continue to improve, and recent economic reports have been better than expected. Consumer inflation (CPI) rose at the slowest pace in over 3 years, the ISM Services Index remained in growth territory, weekly jobless claims remain favorable, new home activity picked up in August, industrial production increased, and retail sales increased.
Stocks:
The S&P 500 crossed above 5,700 for the first time, the Dow Jones Industrial Average reached 42,000 for the first time, but the Tech-heavy Nasdaq recently remained about 3% below its July high. For both calendar years 2024 and 2025, analysts are expecting more than 5% sales growth and more than 10% earnings growth. The forward price-to-earnings ratio of the S&P 500, and of the majority of sectors within, are still above their 5-year and 10-year averages. Unlike the first half of the year, the Technology and Communications sectors have lagged over the past two months, while interest-rate-sensitive sectors like Real Estate, Utilities, and Financials have outperformed the broader market, demonstrating a benefit of having diversified portfolios.
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