October 2024 Market Commentary

October 9, 2024

• Federal Reserve ends its interest rate hike cycle, cuts rates by 0.50%.
• Treasury yield curve normalizes after 27 months, ending inversion.
• September unemployment declines 0.1% to 4.1%.
• Returns: S&P 500 2.3%. Bloomberg US Aggregate Bond index 1.4%.

In a scene reminiscent of the start of August, markets stumbled again to begin September, as disappointing manufacturing and labor market data renewed doubts about the economy’s strength. Like August, markets quickly recovered, buoyed by expectations of rate cuts at the Fed’s September Federal Open Market Committee (FOMC) meeting.

Following Fed Chair Jay Powell’s declaration in August that “The time has come for policy to adjust” a rate cut at the Fed’s September FOMC meeting was a foregone conclusion. The only real question was how large a cut the Fed would enact. Initially, expectations were for a 0.25% cut, with the belief that a larger 0.50% cut might spook the markets. The fear was that an outsized cut could be interpreted by investors to mean that the Fed was concerned about a sharper economic slowdown than investors were already expecting, despite describing the economy’s underlying strength as “strong.”

However, as the meeting drew closer, market sentiment shifted, accepting the idea that a 0.50% cut would demonstrate the Fed’s seriousness about supporting labor markets. That sentiment was reinforced several days before the meeting when former New York Federal Reserve President Bill Dudley said there was a “strong case” for a 0.50% rate cut and that with the Fed Funds rate ~1.50-2.00% above the so-called neutral rate, the theoretical rate at which monetary policy is neither accommodative nor restrictive, the Fed should “get started” on lowering rates.

Ultimately, that is exactly what the Fed did. Citing “the progress on inflation and the balance of risks” the Fed cut its Fed Funds rate by 0.50%. Speaking at his post-meeting press conference, Fed Chair Jay Powell said the Fed’s actions were a “recalibration” of Monetary policy designed to maintain labor market strength while returning inflation to the Fed’s longer-term target of 2%. Addressing the Fed’s dual mandate—price stability and maximum employment—Powell said the Fed had greater confidence that inflation is moving “sustainably” towards 2%, while downside risks to employment had increased. The recalibration of policy, Powell suggested, would help maintain labor market strength in the context of moderate economic growth and cooling inflation.

In addition to cutting rates, the Fed released an updated version of its closely watched Summary of Economic Projections (SEP), showing officials expect an additional two rate cuts prior to year-end. Regardless of the updated SEP, markets initially remained optimistic that three additional 0.25% rate cuts before year end might be possible. That optimism began to fade following a speech by Powell at month end in which he said based on the current strength of the economy, interest rate cuts are “a process that will play out over some time” and “not something that we need to go fast on.” In his view, “If the economy performs as expected, that would mean two more cuts this year.”

After showing signs of cooling during the summer, labor markets experienced at least a temporary reprieve in September as nonfarm payrolls added 254K jobs, the strongest pace of growth since March. In addition, unlike other recent months, July and August employment figures were revised up, by a combined 72K jobs. Unemployment also improved, falling 0.1% for the second consecutive month to 4.1%. Coupled with Powell’s comments at month end, the strong jobs report solidified market expectations for just two additional rate cuts by year end.

August inflation data released in September saw the headline Consumer Price Index (CPI) slow to 2.5% from a year ago, its slowest pace in two-and-a-half years. Core CPI, excluding food and energy prices, rose 3.2%, matching July for the slowest pace since April 2021. Shelter prices once again were the largest contributor to inflation, accounting for over 70% of the annual increase in core CPI. Expectations remain that the current slowdown in rents will ultimately be reflected in official government statistics, though that has taken longer to occur than previously expected.

Despite concerns about the health of labor markets, overall economic growth, uncertainties posed by intensified fighting in the Middle East between Israel and Iran-backed Hezbollah, and the upcoming US Presidential election, the S&P 500 rose 2.0%.

The positive returns stood in contrast to September historically being the worst month of the year for the index. Between 1928 and 2023, the S&P 500 experienced an average loss of 1.2%, including the past four years in which the average September return was -5.7%. Small caps (Russell 2000) eked out a smaller 0.6% gain for the month. International market returns were also positive with developed markets (MSCI EAFE) gaining 0.6%, while emerging markets (MSCI EM) jumped 6.5%, aided in part by Chinese officials announcing sweeping stimulus measures designed to jump start the country’s slowing economy.

Like equity markets, fixed income markets also enjoyed positive September returns with the Bloomberg US Aggregate Index, the broadest measure of the US fixed income market, gaining 1.3%. The month itself was an interesting one for fixed income, with yields initially falling to 15-to 24-month lows, before rebounding in the second half of the month.

In response to the disappointing economic data at the start of the month, investors sought the relative safety of bonds. Given the inverse relationship between bond prices and yields, that helped push yields to multi-month lows. Yields also moved lower as investors sought to lock in higher yields ahead of the Fed’s September FOMC meeting.

Yields began to reverse in the wake of the Fed’s meeting as multiple Fed officials suggested that the pace of future interest rate cuts might be slower than markets had been anticipating. That, plus some encouraging economic data, helped push yields higher to close out the month. Retail sales remained strong, jobless claims fell to recent lows, the service sector continued to show expansion, GDP was revised upwards – with second quarter estimates now showing 3% growth.

One notable development during the month was the normalization, or disinversion, of the Treasury yield curve. Under normal conditions, the yield curve is upward sloping, with longer-term bonds providing higher yields to investors than those of shorter-term bonds. During the Federal Reserve’s rate hike cycle of 2022 and 2023, the yield curve inverted with short-term rates, more heavily influenced by monetary policy decisions, rising above long-term rates, which tend to reflect longer-term growth and inflation expectations. Yield curve inversions are widely viewed as harbingers of recessions, so when the curve initially inverted in July 2022, expectations were that a recession would follow soon thereafter. If an inversion is considered an ominous signal, it would stand to reason that the normalization of the yield curve would be a positive development. Some analysts suggest, however, that normalization itself is also a harbinger of recession, with the idea being that the short end of the curve has dropped below the long end of the curve in direct response to the Fed lowering rates in an attempt to support a slowing economy. Support that historically has been too little, too late, or both, to prevent a recession.

Unlike the Treasury market, the municipal bond market experienced far less fluctuation during the month, as muni investors took more of a wait-and-see approach with respect to the Fed’s September meeting and the release of additional economic data that might shed additional light on the underlying strength of the economy. Instead of the large fluctuations experienced in the Treasury market, muni yields slowly declined over the course of the month, with the 2-year AAA municipal yield falling 0.09% and the 10-year AAA municipal yield falling 0.07%.

Investment and insurance products and services are not a deposit, are not FDIC- insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value.

Information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities. It is not possible to invest directly in an index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Past performance is not a guarantee of future results. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. The views and opinions expressed in this publication are subject to change, at any time, without advance notice or warning.