September 2024
The following facts and statistics describe the financial situation in the United States from January 1st to September 13, 2024:
All three major indices are currently flat for the month of September and have been very volatile. Historically, September is one of the most volatile months of the year.
The S&P 500 is up 18 percent year-to-date.
The S&P 500’s P/E ratio currently stands at 29.43 for the trailing 12 months and has a forward P/E, based on issued guidance, of 20.9 (the 5-year average forward P/E is 19.4, and the 10-year average is 18).
The NASDAQ is up 17.8 percent year-to-date.
The Dow Jones Industrial Average is up 9.83 percent year-to-date.
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
For Q3 2024, the estimated year-over-year earnings growth rate for the S&P 500 is 4.9%. If this rate holds, it will mark the 5th consecutive quarter of year-over-year earnings growth for the index (John Butters, FactSet).
On June 30, the estimated year-over-year earnings growth rate for the S&P 500 for Q3 2024 was 7.8%. Nine sectors are expected to report lower earnings today compared to June 30, due to downward revisions to EPS estimates (John Butters, FactSet).
The Personal Consumption Expenditures (PCE) price index, a measure favored by the Federal Reserve, increased by 2.5 percent in July compared to the same month last year. From June to July, the index rose by 0.2 percent. Prices for goods fell by less than 0.1 percent, while prices for services increased by 0.2 percent. Food prices also rose by 0.2 percent, and energy prices increased by less than 0.1 percent. Excluding food and energy, the PCE price index rose by 0.2 percent from June to July and by 2.6 percent from July of the previous year.
Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2024, according to the "second" estimate. In the first quarter, real GDP increased by 1.4 percent. The increase in the second quarter primarily reflected rises in consumer spending, private inventory investment, and business investment. Imports, which are subtracted in the GDP calculation, increased.
Private sector employment increased by 99,000 jobs in August, and annual pay was up 4.8 percent year-over-year, according to the August ADP National Employment Report. “The job market’s downward drift has led to slower-than-normal hiring after two years of outsized growth,” said Nela Richardson, chief economist at ADP. “The next indicator to watch is wage growth, which is stabilizing after a dramatic post-pandemic slowdown.”
On the last business day of July, the number of job openings was little changed at 7.7 million, down by 1.1 million over the year. The job openings rate, at 4.6 percent, was little changed in July. Job openings decreased in health care and social assistance (-187,000), state and local government (excluding education) (-101,000), and transportation, warehousing, and utilities (-88,000). Job openings increased in professional and business services (+178,000) and in federal government (+28,000).
As of August 2024, the unemployment rate in the United States was 4.2%, up from 3.8% in August 2023.
The labor force participation rate, at 62.7 percent, and the employment-population ratio, at 60 percent, were little changed in August.
The Consumer Price Index for All Urban Consumers increased by 0.2 percent on a seasonally adjusted basis, the same increase as in July. Over the last 12 months, the index for all items increased by 2.5 percent before seasonal adjustment.
The index for all items less food and energy (core CPI) rose by 0.3 percent in August, following a 0.2 percent increase the preceding month. The core CPI index rose by 3.2 percent over the last 12 months. Indexes that increased in August include shelter, airline fares, motor vehicle insurance, education, and apparel. Indexes that decreased over the month include used cars and trucks, household furnishings and operations, medical care, communication, and recreation.
Advance estimates of U.S. retail and food services sales for July 2024, adjusted for seasonal variation and holiday and trading-day differences but not for price changes, were $709.7 billion, an increase of 1.0% from the previous month, and up 2.7 percent from July 2023. Total sales for the May 2024 through July 2024 period were up 2.4 percent from the same period a year ago. The percent change from May 2024 to June 2024 was revised from virtually unchanged to down 0.2 percent.
The yield curve between the 2-year and 10-year Treasury Bonds has turned positive and is currently at +0.09. The last six recessions have occurred after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s balance sheet currently shows $7.115 trillion in assets, down from its peak of $8.965 trillion in April 2022. This represents a reduction of 20.6 percent. The Federal Funds rate is currently set between 5.25% and 5.5%. The market is currently pricing in a 50 percent chance that the Fed will cut the federal funds rate by 25 basis points, and a 50 percent chance of a 50 basis point cut. The CME FedWatch Tool has a 61 percent probability of a cut of 50 basis points to the Fed Funds rate, which would lower it to between 4.75% and 5% in September.
QUESTION FOR CONSIDERATION
With the Federal Open Market Committee (FOMC) meeting scheduled to take place in two days, what steps, if any, should individuals consider taking to optimally position their investment portfolios? Are there specific strategies or considerations that could help in mitigating risks or capitalizing on potential outcomes from the meeting?
THE BOTTOM LINE
The Great Rate Debate: Market Movements, Inflation Data, and the Impact on Stock Risk Premiums
Investors anxiously awaited the release of the latest inflation data, and now that the Consumer Price Index (CPI) report is out, markets are evaluating its broader implications. Despite some positive movements, the S&P 500 and other indices remain flat this month, largely due to mega-cap stocks struggling to find stable ground amid the typical volatility of September.
Additional factors weighing on the markets include signs of economic weakness, such as U.S. Crude Oil futures (/CL) falling below $66 per barrel, 2-year Treasury yields hitting a 52-week low, and Bitcoin (BTC) remaining below its summer highs. Moreover, recent labor market data pointing to a slowdown further contributes to uncertainty.
Now that the CPI report has confirmed a 0.2 percent month-over-month rise—matching expectations—the Federal Reserve's next move is under heightened scrutiny. The fact that the rate of inflation seems to be under control raises the possibility of a Fed rate cut, which is a central issue in the ongoing "Great Rate Debate."
A crucial part of this debate centers on how interest rates and Treasury yields influence the risk premium on stocks. This premium reflects the additional return investors demand for taking on risk compared to investing in a "risk-free" asset such as U.S. Treasury instruments. Fluctuating interest rates affect the risk-free rate of return, which directly impacts the equity risk premium. The key question now is whether the Federal Open Market Committee (FOMC) will reduce rates by 25 or 50 basis points.
The risk-free rate—often represented by Treasury yields—serves as a baseline for evaluating investments. When yields are low, as they currently are (with the 10-year Treasury note yield down to 3.64 percent, the lowest since mid-2023), investors tend to demand a higher return from stocks to compensate for taking on additional risk, widening the risk premium.
Conversely, rising interest rates make bonds and other fixed-income assets (such as money markets, which still yield over 5 percent) more attractive. As their returns start to rival or exceed those of equities, the risk premium narrows, making stocks less appealing relative to "safer" investments.
In today’s environment, the Federal Reserve’s policies on interest rates are pivotal in shaping the evolution of the risk premium. A potential rate cut—I expect it to be a quarter-point (25 basis points) in September—is largely priced into the market. Typically, lower rates decrease the risk-free return, boosting stock investment by making bonds and other safe assets less competitive.
Another factor affecting market sentiment is the upcoming November election. The outcome could significantly influence stock performance, as policies set by the winning party will affect sectors across the economy. Regulatory changes, tax policies, and fiscal initiatives could either support or hinder different industries, adding another layer of uncertainty to the market.
Despite mixed performance across various sectors, gains have been seen in both defensive and growth-oriented areas such as real estate, consumer discretionary items, and technology. Energy stocks, however, continue to underperform due to declining oil prices, which adds to concerns about the overall economy. At the same time, strong demand for Treasuries suggests that many investors are still seeking safety in fixed-income assets amid economic uncertainty.
As the CPI report shapes expectations, the Fed’s next moves on interest rates will be critical. If the anticipated rate cut occurs, it will likely lower Treasury yields further, widen the risk premium on stocks, and potentially drive increased demand for equities. However, the immediate impact may be limited because the market has already priced in this rate cut.
The "Great Rate Debate" underscores the importance of understanding how interest rates and broader economic conditions influence stock performance and the risk premium. As the market navigates inflation data, potential Fed rate cuts, and political uncertainties, maintaining a diversified portfolio will be key to helping investors manage volatility and secure more stable returns. And that’s The Long and Short of It!