Monthly Market and Economic Update - August 2024

Current Market and Economic Conditions

• In August, the S&P 500 Index was up 2.34%, while the Bloomberg Barclays US Aggregate Bond Index was up 1.44% and the Bloomberg Barclays Municipal Bond Index was up 0.91%.
• The stock market reacted positively to the likelihood that the Fed will lower rates in September. 
• With continued improvement in the inflation numbers, yields continued to fall, which is positive for bonds. 
• The question for the markets is not whether the Fed will lower rates in September but by how much.

Bond Market     

• The official comments following the Federal Open Market Committee meeting seemingly telegraphed a September rate cut, noting that the central bank is back to evaluating both sides of its dual mandate — inflation and employment. Still, the "we're watching the data" and "we have made no decisions" mantras that Chair Jay Powell has been repeating all year still made an appearance at the press conference. "The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," Powell said. The bond market reacted favorably to this news as interest rates continued to fall in August. From the beginning of July, the 10-year Treasury yield has dropped more than ¾ of 1%.
• The Futures market is projecting a 70% chance of a ¼ point reduction in the Fed Fund rate in September and a 30% chance of a ½ point reduction. By the end of the year, the futures market is forecasting a full percentage point reduction. This means that during the three meetings before the end of the year, the futures market has the Fed making two quarter-point reductions and one half-point reduction. Which meeting will result in the half-point reduction is not clear yet. 
• For bond investors, the combination of higher current interest rates and rising values due to falling interest rates may result in a rather ordinary but potentially positive remainder of the year for bonds. Given the volatility in bond values over the past few years, ordinary is likely very welcome. The probability of a soft landing for the economy is increasing. 2024 started with strong results for the key indicators for economic growth – jobs growth, consumer spending, and industrial production. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. 

Stock Market

• The job market has been softening recently. The number of open jobs as measured by the JOLTS Index has declined from the all-time high of 12 million at the beginning of 2022 to around 7.6 million more recently. Rather than softening, the job market should be viewed as normalizing. Aside from the post-Covid high point, 7.6 million jobs available are still more than were open at any previous time over the past two decades. Jobs are still very plentiful and the initial claims for unemployment remain within the range of the all-time lows. Taken together, this points toward continued consumer demand and continued growth in the economy. 
• Inflation was initially caused by the significant government stimulus but became stickier due the sustained imbalance in the job market – too many jobs available and too few people to fill them. This caused wages to grow and led to continued pressure on prices. As the job market normalizes, so too has inflation and interest rates. They are all connected. The Fed has been waiting for this to begin to show in the data. What we are seeing is not the sign of an economy in freefall but, instead, a job market and economy getting back to equilibrium.
• The stock market return year-to-date is well ahead of a typical election year. Historically, election years are somewhat volatile in the months leading up to the election. However, history also shows that regardless of the election outcome, the stock market mostly focuses on earnings, interest rates and the growth of the economy. Given the strength of the market thus far this year, it has room for a little short-term volatility while remaining on track for a positive 2024. Any drawdown should be viewed as an opportunity to rebalance and take advantage of the normalizing economy. 
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve now poised to pivot to lower interest rates during the final part of 2024, stock market leadership is broadening out to include stocks that have been overlooked and undervalued. Those opportunities can be found in both US and international stocks. Investors should focus on the longer-term path of the stock market and the economy and take advantage of any short-term correction by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.