Weekly Newsletter: September 16, 2024
“What’s it gonna be (Powell) boy, 25 or 50”? With a big apology to Paradise by the Dashboard Light, it is a question investors are asking. Of course, the follow-up will be whether he will go all the way to 100-150 basis point cuts that investors expect. The inflation data came in relatively tame, at least no huge surprises. Jobs data is on the weaker side, but not seeing layoffs, which could indicate a more serious job condition. Stepping back and looking at historical “norms”, inflation has been running around 2.5% since 2000 and about 3% annually since 1913. Today’s inflation of roughly 2.5% is right in line with history. Economic growth has historically been roughly 2% over the last 25 years, and nearly 3% going back to 1947. The most recent data point is right in line with the past 25 years. Finally, looking at 10-year yields, the average yield this century has been 3.25%, slightly lower than today’s yield of 3.66%. Stepping away from the dayto-day noise, it would seem that rates are not too far away from historical norms as are inflation and economic growth. Maybe the Fed should be sleeping on it and give the markets their answer in the morning.
The discussion about rate cuts impacting the election has long passed. The focus has been on how much and how fast the Fed will cut rates and more importantly the impact on the economy. Over the past 15+ years, individuals and corporations alike restructured their debt, by refinancing at very low rates and extending their final payment many years into the future. So the rate increases that stopped over a year ago do not have the same impact as they used to as debt structures were much shorter. The “long and variable” lags of changes in interest rate policies are being severely tested. A recession was expected last year, but so far, nothing. Companies were expected to begin layoff programs to keep margins and profits up. Again, so far, not really. The financial largess of the expanded Fed balance sheet and various government programs have kept the economic wheels well-oiled and potentially extended the economic growth well beyond its typical expiration date.
The return on bonds in the third quarter has been among the best in the post-pandemic period. Just in September, rates have declined nearly a quarter of a percent for 1, 5, and 10-year bonds. Bond investors will be listening closely to the press conference that follows the rate decision by the Fed on Wednesday. Additional information will be provided by the “dot plots” or the various Fed official’s estimates of the future direction of rates over the coming year. The plot does not provide a blueprint for the actual direction of rates as the Fed is likely to remain data-dependent. Translation: they reserve the right to change their minds depending on the latest data point.
Since technology stocks (temporarily?) peaked in July, the winners have been the remaining 493 stocks in the SP500. Value and small stocks in general have had a very good quarter while technology stocks in general have declined. Along with the resurgent bond market, even international stocks have bested the SP500. To be fair, much of all that outperformance has come during July when small stocks rose nearly 10%. There have been plenty of “false starts” when technology stocks seem to be done only to see them regain a market leadership position. Over the past 3-6 months the spread between the flying technology sector and the average stock was as large as early 2000. While history may not repeat itself, it would at least argue to reduce exposure to the tech sector for a while.
The Fed meeting will be taking up all the oxygen this week. No matter their decision, there will be plenty of second-guessing. This also means that the Fed governors will also be out on the chat circuit later in the week to explain how they see the economy and the likely future direction of rates.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.