The final quarter of 2024 has arrived, and it promises to deliver a lot of much anticipated data. Jobs and inflation data, Fed guidance on interest rates, election results, and continued geopolitical risks are just a few of the important pieces of information we will receive this quarter.
Coming off two lackluster job reports of less than 100k new jobs (factoring in revisions) in July and August and a general downward trend in job growth, September’s jobs numbers surprised to the upside with a gain of over 300k (including revisions) and provided the overall market with a jolt of confidence in how the economy is performing (based on initial reporting for each month).
The latest jobs report came on the back of the Fed’s September meeting where they lowered interest rates for the first time since 2020 when the COVID pandemic hit. The Fed has signaled they are comfortable with where inflation is heading, and are starting to focus more on their concerns about job growth. The initial rate cut in September was a larger than usual 50 bps with the Fed’s “dot plot” suggesting another 200 bps of rate cuts through 2026. The pace and ultimate end point of this rate cut cycle will be determined by how the economy performs and the corresponding data the Fed receives.
With that, the market will likely continue to keep a close eye on Fed actions to see whether there are changes in the anticipated pace, direction, and final level of interest rates. We would prefer if the Fed did not have such outsize influence on market participants, such that the fundamentals of investments would be of primary concern. At this point in time, that is simply not the case, and we have to continue to focus on the Fed and try to anticipate their next moves and the effects that will have on the broader market and economy. The Fed has two more meetings in 2024 where they will provide further guidance on their views, as well as likely further cuts in interest rates.
Another important data point we will receive this quarter is the results of the 2024 US presidential and congressional elections. The two parties are offering starkly different views and economic policies. With that, it is impossible not to factor in certain policy changes to the investing landscape. However, we would like to caution our clients and others not to wrap your politics too closely to your investing. Just because an opposing party wins an election, does not mean the stock market will necessarily tank. As you can see in the chart below, through both Democrat and Republican administrations there is a clear trend over time, and that is positive market performance.
The other important thing to note is, this election is about the President as well as Congress. The results of each matter, and play into what policies can be expected to be enacted under the next administration.
Finally, we are continuing to see an escalation of tensions on the geopolitical front. Russia is receiving more and more support from China and North Korea, with the latter entertaining sending troops to support Russia against Ukraine. Israel’s war with Hamas-Hezbollah-Houthis-Iran, seems to add a new front each week even while Israel makes progress. And China continues to saber rattle over Taiwan. An axis seems to be forming among authoritarian regimes around the world, and the prospect for this to burst into a wider war is real and growing. Let us all hope things cool down soon, so we can avoid the worst effects of this, which will impact many economies in many countries.
- Federal Reserve Policy. The Fed lowered its interest rate target by 50 bps to 4.75%-5.00%. Growth in M2 money supply has increased during the quarter. Fed has signaled a slowdown in its Quantitative Tightening bond campaign, but has not stated when, how, or if they intend to reduce the size of their bond portfolio back to pre-crisis measures.
- Economic Growth – GDP. Growth settled in at 3.0% for Q2, and Q3 is currently projected to be in the 3.0% range as well, according to GDPNow forecast by the Atlanta Fed. This cements the view that the Q1 slowdown was an outlier and would seem to suggest a recession is not immediately around the corner.
- Labor Markets. Unemployment ticked down with the latest couple of jobs reports, now sitting at the same level it started Q3, 4.1%. Job growth has been generally slowing this year compared to last year’s pace, although October had a relatively strong report.
- Inflation. Inflation has continued to moderate and CPI currently sits at 2.4%. Core inflation readings are a little higher, which is part of the reason victory has not yet been declared. The Fed’s target is 2.0% inflation, so we are getting close to that target.
- Consumer Sentiment & Spending. Consumers have been coming under a little strain as excess savings were depleted towards the beginning of 2024. Retail sales are still increasing, however, at a pace slower than inflation suggesting real retail sales are slipping into negative territory.
- Housing & Real Estate. Interest rates continue to tell the story for real estate. While the sector is still struggling from high borrowing costs, there may be light at the end of the tunnel as the Fed has now started to lower interest rates. This will not be a quick process, but should provide a floor of support to this sector of the economy.
- Business Investment & Manufacturing. We continue to see overall contraction in the manufacturing side of our economy according to recent ISM survey results. This measure has been in contraction for 22 of the last 23 months now. At the same time, the service side of the economy continues to hum along with healthy growth readings under the same ISM survey results.
- Regulatory Environment. The FCC’s net neutrality rules were struck down in court. The FTC’s noncompete ban was also struck down in court. Regulatory rulemaking has slowed as the election approaches and regulators face the prospect of their rules being overturned by the CRA with a new administration. Expect this to pick back up should VP Harris secure the election.
- Budget Deficit. The US budget deficit just came in at a little over 6.0% of GDP for the second year in a row. For context, the US did not run a budget deficit of more than 6.0% of GDP from 1947 (end of WWII) until the financial panic of 2008-09. That period of time included multiple wars, including Vietnam, Korea, Cold War, Iraq War, and Afghan Wars. It also included multiple years with severe recessions. Now, we have had large deficits in years where we are not in recession and also not directly at war. It seems the US does not want to go back to the spending of just a few years ago and is trying to lock in pandemic era spending levels. This is a growing risk to the overall credit of the US with potential effects on interest rates and the broader economy in the long-run.
- Global Economy. Central banks continue to lower interest rates around the world. There continues to be no end in sight to the Ukraine-Russia war, the Israel-Hamas-Hezbollah-Houthis-Iran war. The Ukraine-Russia war continues to have an outsize effect on European economies, especially as it relates to energy policy. China continues to struggle to find its growth footing and is implementing more stimulus via relaxed home ownership and bank lending rules.