Published October 4, 2024
Below we have a good overview from JP Morgan of the broad state of the U.S. economy and market action in the just-completed quarter.
“The U.S. economy appears to have maintained a solid growth pace over the summer, fueled by resilient consumer spending. At the same time, inflation continued on a path back toward the Federal Reserve’s 2% target, while a rising unemployment rate sparked fears the labor market is cooling too quickly. Moving forward, resilient consumer spending should support trend-like economic growth into 2025, and, with few excesses building across the cyclical sectors of the economy, a near-term recession seems unlikely.
Meanwhile, cooling inflation has allowed the Federal Reserve to put more focus on the labor market, prompting it to join other global central banks in easing policy and deliver a 50-basis point rate cut in September. While the Fed’s updated economic projections forecast two more rate cuts this year, the pace of cuts will depend heavily on the incoming data. It does appear, however, that rates will settle at a structurally higher level relative to the past decade barring any economic shocks.
For markets, this summer was anything but calm. Equity market volatility spiked in August due to lackluster guidance from the Magnificent 7, weaker economic data and policy action from the Bank of Japan. However, market jitters have faded in recent weeks, with broadening earnings growth and rate cut bets pushing markets higher and leaving valuations elevated. Expectations for dovish policy action have helped bonds rally too, and yields are lower now than at the start of the year. With the U.S. election quickly approaching, geopolitical tensions still elevated and the Federal Reserve keen on normalizing policy without sending gloomy signals, risks remain that could keep markets volatile and tip the U.S. into recession.
But we do not see many signs for concern yet. After a sluggish start to the year, the U.S. economy accelerated during the second quarter, growing at a 3.0% annualized pace. While inventory accumulation was a large contributor, underlying demand was robust with consumer spending rising by an impressive 2.8%. However, other economic data, ranging from PMIs to employment indicators, have begun to slow, sparking fears that the economy may be closing in on a recession. However, with few excesses building across the cyclical sectors of the economy, a recession seems unlikely.”
Overall, the stock market appears to be following a typical seasonal pattern for Year 4 of a presidential cycle as the chart from Fidelity shows below. The pink background line is the aggregate of prior cycles with the black line the current market path. The chart suggests continued market strength into year-end followed by a flat and bumpy path typically in the first year of the presidential cycle.
If you are an investor in small cap stocks, you just need to get through the next three weeks before a hearty 4th quarter – if history averages repeat this year.
Market Update
Stocks turned the page this week on a successful third quarter leaving all major indexes very near record highs. The quarter closed Monday in a muted but positive session. Fed Chair Powell noted that future interest rate cuts would probably not be the hefty 0.5% cut the central bank unleashed in September. The fourth quarter kicked off Tuesday with a -1% drop. A barrage of rockets fired from Iran at Israel unnerved investors while a negative analyst report hit Apple’s stock price. The geopolitical concerns continued to overhang markets Wednesday though stocks managed a flat finish. Oil prices moved higher once again on concerns that a widening conflict between Israel and Iran would crimp oil supplies. Thursday brought a +5% pop higher in oil prices as President Biden mentioned that an Israeli strike on Iran’s oil facilities was under consideration. Stocks, however, closed only fractionally lower.
The monthly jobs report dropped Friday with significantly positive news across the board. Jobs substantially exceeded forecasts while numbers for the prior two months were also revised upward; the unemployment rate fell to 4.1% from 4.3% in June. Stocks moved higher by +1% as interest rates surged. The positive economic report squashed hopes for a larger 0.5% rate cut at the Fed’s next meeting – ironically, bringing investors in line with Fed Chair Powell’s earlier comments. Through the week, the boom in China’s stock market also continued with investors believing, for now, that the stimulus measures announced by the Chinese government would be successful.
Stocks shook off early weakness to begin October with a slim gain. The S&P 500 ticked higher by +0.26%. The Nasdaq 100 (QQQ) closed +0.12% for the week. Small cap stocks slipped -0.54%. The 10-year U.S. Treasury yield zoomed upward moving from 3.7% to just under 4.0% on the strong employment report. Crude oil prices jumped from $67.50 per barrel to $74.50 on the week’s news leading to advances in energy stocks.
Warm wishes and until next week.