Weekly Newsletter: November 4, 2024
“Will things ever be the same again? It’s the final countdown”. By Friday, with any luck, the decision from the Fed will be embraced by the financial markets and the road forward will be clear. Oh, and the same for the election. There may be two outcomes this week. The first is plenty of volatility with large up and down days as investors digest the headline news. By Friday, the market could be up or down by more than 2%. The other outcome is more of a yawner. The election commercials are over, the Fed cuts rates by 25bp as expected and by Friday the markets are essentially where they finished this past week. For the Fed, the stage has been set for a quarter-point cut in rates if the employment report is the basis for that move. Non-farm payrolls were a measly 12,000, well below the 100k estimate. Much of the miss was due to the dual hurricanes and Boeing strike, but the labor department could not quantify how much those events impacted the figures. As usual, the press conference following the announcement by Fed Chair Powell will likely move markets too, as investors try to glean information about the pace of future cuts in 2025. No matter how the chips fall, it will be a week to remember or sleep through.
The surprisingly small growth in the labor force did not change the market’s views on the direction of interest rates, lower for the foreseeable future. There are a few things to consider before getting too comfortable with that thought. First, as mentioned above, there were plenty of “one-off” items this past month. Second, wage growth remains robust above the 4% level and has been well ahead of inflation for much of the past 10 years. Third, core inflation, after taking out the volatile food and energy components, is sticking around 2.7-3%. And finally, economic growth, based on the latest GDP report, is not falling apart. So, why is the Fed cutting rates? An easy question with a complicated and likely incomplete answer. The Fed believes rates are restricting economic activity and the job market may continue to weaken in the months ahead. Higher rates have not hurt the economy to this point. So, it begs the question, will lower rates have an impact on the economy? Maybe the press conference will provide some answers.
Bond investors have been taking a walk on the wild side since the last Fed meeting. Rather than declining, rates have steadily been rising with the yield on the 10-year treasury back to levels on the fourth of July. This begs another interesting question: If the Fed is cutting rates, why are yields rising? Another easy question with a complicated and incomplete answer. Concerns over the rising deficit and the Treasury’s ability to “sell” bonds to fund it may be at the heart of the matter. It may also be that bond investors fear the path to lower rates may re-ignite inflation, forcing the Fed to reverse policy in 2025. Finally, it may also be that financial conditions are not all that tight and the Fed is reading the economy wrong. These questions are not likely to get answered at the press conference following the Fed meeting.
In addition to all the politics and the Fed “stuff” this week, earnings continue to roll in. The disappointing reports from Amazon and Microsoft were offset a bit by better numbers from Alphabet (aka Google) and Intel. This week, another 20% of the SP500 companies report. Based on what is in the books so far and estimates for the rest, the SP500 is selling for 28x those earnings. The last time the market was this “expensive” was late in 2021, before falling 25% in the first nine-plus months of 2022. Before 2021, it was the dot-com bubble that saw technology names fall by more than 50%. Is the market doomed to repeat the past? Maybe. High current valuations make it tough for future returns to continue to be above average. A better strategy might be to look for value in the market than to blindly follow the large-cap indices.
The election and the Fed will be the focus for the week. Hopefully calm will prevail.
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.