September Market Commentary

Don’t Jinx This

There’s an unwritten rule in baseball: you never mention a no-hitter while it’s in progress. Teammates will go out of their way to avoid talking to the pitcher, staying as far from him as possible for fear of jinxing the no-hitter. The same superstition could be applied to the Federal Reserve’s current economic balancing act.

After the better-than-expected jobs report on October 4th, the media is full of talk about a “soft landing” and a
“Goldilocks economy.” If Fed Chair Jerome Powell were like a pitcher in the final innings of a no-hitter in progress, this kind of talk would be unwelcome. Though most experts won’t express concern about jinxing the
possibility of a soft landing, they would acknowledge it is far from certain until it happens, and there are plenty of risks on the table that could wreck the Fed’s “no-hitter.”

The table below from the attached quarterly market report recaps that investment returns across the primary asset classes were much better than average in the third quarter of 2024. The table offers the average, best, and worst quarter returns since 2001 for comparative purposes.

However, it was not a steady, linear climb as it seldom is. In July, the stock market had mixed results. While most indexes closed higher, tech stocks, which had led growth earlier in the year, experienced a pullback,
with the tech-heavy NASDAQ (1) seeing its worst July since 2014 and semiconductors, particularly, entering a correction by late July. In contrast, it was the best month of the year for the Russell 2000 (1) and Dow Jones
Industrial Average (1), with real estate, financials, and utilities outperforming. Inflation came in lower than expected at 3.3%, boosting hopes for rate cuts from the Federal Reserve. This optimism led to a rally in small-cap stocks, but weaker-than-expected job growth and concerns about an economic slowdown shifted
market sentiment.

In August, stocks generally rose, supported by strong market gains at the end of the month, thanks to positive inflation data and economic reports. Investors were optimistic about comments from Federal Reserve Chair
Jerome Powell, hinting at possible upcoming interest rate cuts. Inflation continued to stabilize, with the CPI
and PCE indices nearing the Fed’s 2% target. Job growth, however, slowed in July and August, revealing signs of a weakening labor market.

At the Jackson Hole Symposium, Powell expressed growing confidence in controlling inflation and downplayed the risk of further inflationary pressures from the labor market. This was seen as a signal that
rate cuts were likely. However, some analysts expressed concern that the Fed may have waited too long, given signs of economic weakness and potential disappointments in corporate earnings.

September, historically a poor month for stocks, bucked that trend, with each benchmark index closing the month higher. The Fed’s September 18th 50.0 basis-point Fed funds rate cut, coupled with signs of
resilience in the economy, helped raise investor confidence in the stock market. After the Fed’s rate cut, stocks generally increased, although several Fed officials tempered their comments concerning whether or when additional rate cuts may occur. Crude oil prices ended the month lower as weaker demand, coupled with rising surpluses, eclipsed concerns over escalating tensions in the Middle East.

In summary, recent economic developments and Federal Reserve policy show that inflation has eased and is approaching the Fed’s target. While the labor market remains resilient, it has weakened enough that controlling inflation is no longer the Fed’s primary concern. As a result, on September
18th, the Fed shifted to a less restrictive stance by cutting rates by 50 basis
points, aiming to reach the “neutral rate” — a theoretical level where monetary policy is neither too restrictive nor too accommodative, or, as Goldilocks would put it, “just right.”

The graphs below depict the last five years of inflation, employment, and the Fed Funds rate. The pandemic and the fiscal and monetary stimulus response were economic shocks that still reverberate. Some may say we
are in the late innings of the economic system, finding a new equilibrium. Others may point to the deficits and national debt run-up and postulate that it will take extra innings before the extent of the pandemic response consequences have run their course.

Further rate cuts will be necessary to reach a more neutral rate. However, financing the government’s growing debt and deficits puts upward pressure on the longer end of the yield curve. As a result, while the yield
curve may eventually normalize, it could come with higher long-term rates and, consequently, higher mortgage rates, adding further complexity to the economic landscape.

We’re in a seasonal period that is typically turbulent for the investment markets. September and October are known to be tough months for stocks. Election polls reflect a close presidential election that feels
especially unpredictable. There’s been a last-minute switch in one party’s candidate, and the other candidate has faced multiple assassination attempts. With about a month left until election day, would any development be a surprise?  Significant, front-burner geopolitical risks in the Mideast and Eastern Europe could boil over at any moment. The Carolinas are still reeling from the worst hurricane since Katrina, and the damage to central Florida from Hurricane Milton is in the very early stages of being assessed. These events could be economically consequential.

But despite all these challenges, there are counterbalancing, positive economic fundamentals. Inflation is falling closer to the Fed’s target, central banks worldwide are easing rates, and the latest jobs report was
much stronger than expected. The economy continues to grow, stock indexes are near all-time highs, and September 2024 was the best September since 2013, and some major investment firms have raised their S&P targets for the end of 2025.

The graphic below overlays the aforementioned events and more upon the MSCI All Country World Index. Rewinding the headlines of the 3^rd quarter reminded me of the many events that moved markets during the quarter.

However, it’s important not to get too caught up in the moment. If you’re a long-term investor, trying to predict short-term market swings is often a distraction that can hurt your overall returns. This is why staying focused on the more significant, longer-term picture tends to be the best strategy, especially when things seem uncertain.

As always, we’re committed to helping you develop a long-term strategy that aligns with your goals, timeline, and comfort level. We’re focused on creating diversified, cost-effective, and tax-efficient portfolios to support your financial objectives, regardless of market conditions.

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