Inflation & the Federal Reserve
The Federal Reserve has held rates at a recent high of 5.25-5.50% since July 2023. Ending much speculation on Wall Street, the Federal Reserve cut rates by 0.50% at its September meeting. The Fed cited softening inflation on its preferred metric, the Personal Consumption Expenditures (PCE) Index, excluding food and energy. In August, the PCE price index excluding food and energy was up 2.7% from one year ago. The Core Consumer Price Index, often cited in news headlines, was up 3.3% on an annualized basis through September, unchanged from the prior quarter. Unemployment, another metric under consideration, came in at 4.1% in September, and annualized wage growth came in at 4.0%.
While inflation is softening, the unemployment rate has been lower than expected. Markets are back to speculating on the timing and size of the Fed’s next rate cut. Following the September meeting, the Federal Reserve’s expectation was a smaller cut later this year and more cuts coming in 2025. There are two Fed meetings remaining on the calendar in 2024, in November and December.
Economic Growth & The Consumer
The U.S. economy rose at an annualized pace of 3.0% in the second quarter, an increase from the prior quarter in which GDP rose just 1.4%. The second quarter increase reflected rising private inventory investment and an acceleration of consumer spending. These gains were partially offset by a downturn in residential fixed investment.
The Surveys of Consumers from the University of Michigan gauges consumer sentiment on personal finances and general economic health. October’s report shows a rise year-over-year in the index of consumer sentiment, up 3.4%. Consumer sentiment on current economic conditions declined 11% over the same period; however, consumer expectations on long-term conditions was up 13.2%. The Surveys of Consumers also reported that many consumers’ expectations are focused on the outcome of November’s elections.
Fixed Income Markets
The Bloomberg U.S. Aggregate Bond Index returned 5.2% for the third quarter. All sectors were positive for the period, led by Developed International Bonds, up 10.0%. Long Government Credit returned 8.0%, and Emerging Markets Debt had the third highest return, up 6.1%. While the yield curve had been inverted for over a year, with short-term rates exceeding long-term rates, this quarter saw a normalization. The yield on 2-year Treasuries came in at 3.7%, 3.8% on the 10-year, and 4.1% on 30-year Treasuries.
Equities Markets
The S&P 500® Index was up 5.9% in the third quarter. All sectors, except for energy, saw positive returns during the quarter, led by utilities, up 19.4%. Energy was down 2.3%. All sectors were positive over the one-year period, led by technology, which was up 52.7%.
Returns by Sector are represented by the S&P 500® Index sector total return indices.
Index concentration continues to be a major story. The top ten stocks of the S&P 500® had a combined weight of nearly 35% in the Index as of September 30, 2024. For the one-year period, seven of these stocks outperformed the S&P 500® Index. Two stocks, NVIDIA and Broadcom, had triple-digit returns.
Globally, Emerging Markets (EM) outperformed U.S. Equity by 3%, led by EM Asia, up 9.6%. Developed International Markets, represented by the MSCI World ex-USA Index, outperformed the S&P 500® Index by 1.9%.
Outlook
As noted above, markets continue to speculate on the timing and size of the Federal Reserve’s rate movements. There are two Fed meetings remaining this year, with expectations for one more cut in 2024.
As the November elections draw near, we can expect some short-term market volatility driven by potential outcomes. However, elections have historically had little impact on subsequent market returns.
Adding to the chances of volatility later this year, Congress will revisit government spending in December. Negotiations will be tight as Congress addresses a rising federal deficit. Further, geopolitical tensions could manifest in short-term declines in market sentiment.
As a whole, the consumer is in good shape, as the University of Michigan surveys note increased consumer confidence as inflation subsides. The consumer’s debt-to-income ratio is still below pre-pandemic levels, and unemployment remains low.
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