August Recap and What to Expect in September
As we transition from summer to fall, much of the financial world’s focus is on the Federal Reserve’s anticipated shift in monetary policy. After maintaining steady interest rates for some time, the conversation is now turning toward when—and by how much—the Fed will begin to reduce rates.
While recent job reports from July and August show signs of a cooling labor market, other economic indicators suggest that the overall economy remains on solid footing. Although some speculate that the Fed could implement a significant 50-basis point cut, their data-driven approach suggests a more cautious reduction of 25 basis points is more likely.
Despite ongoing market volatility, investors seem to be embracing a renewed appetite for risk.
A Closer Look at the Data:
- In August, non-farm payrolls grew by 141,000 jobs, falling 21,000 short of expectations.
- Inflation is continuing its downward trend. In July, the Fed’s favored measure, PCE inflation, held steady at 2.5% year-over-year, while the more widely known CPI grew by 2.9%, its slowest increase since March 2021.
- Consumer confidence is bouncing back. In August, the Conference Board’s consumer confidence index climbed to 103.3.
- Second-quarter GDP grew by 3.0%, a substantial increase from the 1.4% rise in the first quarter, driven largely by consumer spending and business investment.
What Does It All Mean?
The Federal Reserve has kept rates stable since July 2023. With its next meeting approaching, all eyes will be on the potential for rate cuts, with a primary question being how quickly those cuts will unfold throughout the rest of 2024 and into 2025.
Interest rate adjustments can take up to a year to fully affect the economy, so the pace of these cuts is critical. As of early September, market sentiment suggests an 88% probability that rates will drop by a full percentage point by December 2024.
Does the current strength of the economy warrant such a large reduction so soon? GDP growth of 3% in the second quarter—more than double that of the first—was fueled by durable goods purchases, such as vehicles and furniture, which are often financed. This points to healthy consumer balance sheets. However, a potential weak spot lies in the fact that personal income only grew by 1.3% for the second consecutive quarter, which could impact future consumer spending, despite the recent boost in confidence.
Chart of the Month: The Fed’s Focus on Labor
While labor markets remain solid, they are starting to cool. Should this trend persist, it may prompt the Fed to accelerate its rate-cutting timeline.
Source: Depart of Labor; Axios Visuals
August Performance in the Stock Market
- The S&P 500 gained 2.28%
- The Dow Jones Industrial Average rose 1.76%
- The S&P MidCap 400 dipped 0.21%
- The S&P SmallCap 600 fell 1.62%
Source: S&P Global, performance data as of August 31, 2024
Of the 11 GICS sectors, nine posted gains, with Consumer Staples leading the way. Despite early volatility, August ended on a strong note, with the market recovering close to its July highs. Notably, the dominance of the “Magnificent 7” stocks lessened during the month.
August Performance in the Bond Markets
- The 10-year U.S. Treasury closed the month yielding 3.91%, down from 4.04% in July.
- The 30-year U.S. Treasury finished at 4.20%, down from 4.31%.
- The Bloomberg U.S. Aggregate Bond Index gained 1.44%, while the Bloomberg Municipal Bond Index returned 0.79%.
What Smart Investors Should Keep in Mind
As we face the first potential rate cuts in over a year, both consumers and investors will need to adjust their strategies. While interest rates are likely to remain higher than in previous years for some time, it’s still an opportunity to lock in favorable rates on fixed income investments. On the flip side, credit card rates and other high-interest consumer debts will decrease slowly, so paying down debt now could save you money.
It’s also important to consider how the changing economic environment impacts your investment portfolio. Are you taking on enough risk, or perhaps too much? Are your investments positioned to benefit from declining interest rates? And for those nearing retirement, are your income investments set to keep up with your needs?
At the heart of sound financial planning is the balance between your personal goals, investment strategy, and economic outlook. That’s where I can help.
Disclaimer
The information provided in this monthly blog post about the stock and bond market is intended for general informational purposes only and should not be construed as personalized financial, investment, tax, or legal advice. The content reflects the author’s opinions and analyses based on current market conditions and historical data, which are subject to change without notice.
Investing in the stock and bond markets involves significant risk, including the potential loss of principal. The strategies and viewpoints discussed in this blog post may not be suitable for all investors and should not be relied upon as the sole basis for making any investment decisions. Past performance is not indicative of future results. We strongly recommend that you consult with a qualified financial advisor, tax professional, or legal expert before making any financial decisions or implementing any financial strategies. Any decisions made based on the information in this post are solely at your own risk.