Weekly Newsletter: September 9, 2024
“You never know about the days to come, but we think about them anyway.” The markets have been anticipating the beginning of the Fed rate-cutting cycle for nearly a year and it looks like it may finally happen. In what was supposed to be “the” economic data point, the jobs report, turned out to be a bit less than satisfying for investors. Yes, the number of newly created jobs was below expectations and prior months were revised lower, but hours worked ticked up a bit as did wage growth. Those getting fired did not rise dramatically, indicating companies are hanging onto workers and just maybe the job market is not as dire as everyone expects. Investors are not looking at the inflation data due this week, still anticipating that the Fed will follow through with what a variety of Fed governors have said should be the beginning of lowering interest rates. What has been debated is whether a quarter or half-point cut is appropriate. The modestly “strong” employment data should seal the deal on a quarter-point cut. From there, the Fed will continue to be data-dependent and look for overall economic weakness to justify additional cuts at future meetings.
The employment report was but one data point that indicated the economy is slowing. However, there is a big difference between slowing and contracting. The lack of layoffs by businesses indicates that things are not “that” bad just yet. One other backward looking data point is the Fed’s “Beige Book”, so called due to the color of the report. It is a survey of the various Fed district’s overall economic activity. That report showed nine of the districts with weaker conditions from the prior report, with only three saying their activity was better. So how does the election play into the data? In many election years, and especially one as contentious as this year’s, employers tend to be cautious and hold back on spending. Manufacturers will work down inventory levels to maintain flexibility as the November data approaches. Once the election is decided and the dust settles, we could see a pickup in economic activity as the certainty and makeup of Congress and the White House for at least the next two years is known.
The slings and arrows that have been tossed at the bond market for not providing a cushion to the stock market should be put to bed. The market action of the past six weeks has indicated that bonds, especially treasuries, are doing their job within a portfolio. As yields have been declining and bond prices rising, it is offsetting some of the losses in the stock market, especially this past week. There continues to be certainty around the number and size of the rate cuts into the first quarter, but analysts have been wrong all year about how many and when. If/until the economy shows signs of marked weakness, the Fed is likely to move in a measured, deliberate fashion.
September is quickly living up to its monicker of the worst month of the year. The decline was the worst in six months and quickly brought back memories of the August start. Semiconductors, the market leader for much of the past five years, looks to have peaked in early July and is now down nearly 25% from that peak. It has been on a steep trajectory since bottoming two years ago. Earnings expectations are so high that even Nvidia could not meet those expectations when they reported earnings two weeks ago. The technology sector is ripe for additional consolidation in the months ahead. Better places to “hide” are in the neglected portions of the market that provide good earnings, cash flow, and revenue growth selling at below historical valuations.
The Fed is very likely to cut rates in two weeks, but the path forward will likely be muddied by their dependence on economic data to provide the path forward. The market will do its best to anticipate those moves. Their record of “calling” those moves has been very poor to date.
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.