Monthly Market and Economic Update - September 2024

CURRENT MARKET AND ECONOMIC CONDITIONS     

• In September, the S&P 500 Index was up 2.14%, while the Bloomberg Barclays US Aggregate Bond Index was up 1.34% and the Bloomberg Barclays Municipal Bond Index was up 0.99%.
• The stock market was positive for the month and the quarter on the anticipation of the Fed lowering the Fed Funds Rate by 0.50%. 
• Bond returns also reacted positively as short-term rates going down confirmed that inflation is well under control and that the economy is growing, at least enough for the Fed to start to normalize interest rates. 
• The question for the markets is how much the Fed will lower rates by the end of this year and into 2025.

BOND MARKET     

• The new phase for interest rates has begun. As the Fed future market predicted, the Federal Reserve Open Market Committee (FOMC) has reduced the Fed Funds Rate by fifty basis points (0.50%) in September. The Fed and the futures markets are now projecting quarter-point reductions following the November and December meetings. This will bring the short-term rate down by a full percentage point by the end of the year. The Fed’s “dot plot,” which reflects the Fed’s projections for short-term rates, shows interest rates lowered by another full percent by the end of 2025. Of course, these projections are dependent on the continued progress on inflation and the continued growth of the economy. 
• Bonds have been behaving much better this year for investors. As interest rates fall, bond values rise. Yields have fallen at least a full percentage point across all maturities of the yield curve. 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 the strength of the economy. Recent reports have shown that strength continues. The number of job openings and new initial claims for unemployment reflect a healthy outlook for sustained consumer demand and continued growth in the economy. The US GDP grew at an annual rate of 3% at the end of the second quarter. Based on the GDPNow estimate by the Atlanta Fed, it is currently projected to grow at 2.5% in the third quarter. 
• The stock market’s 20% total return thus far this year has been significantly ahead of the average election year. While there are still many unknowns regarding the election, the stock market has shown less concern with the potential election outcome and displayed more confidence with falling interest rates and inflation and with the economy’s ability to sustain growth in earnings. Even a 10% valuation correction would not derail a positive year for the stock market. Any drawdown should be viewed as an opportunity to rebalance and take advantage of the normalizing economy. 
• The US economy transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve now entering the next phase of lower interest rates during the final part of 2024 and into 2025, 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.