October 7, 2024
Economic Commentary
If I had to describe the third quarter of 2024 in one word, it would be “pivotal.” Not because the last three months were critically significant, but because I observed a lot of pivoting. Labor market? Pivoted. The Fed’s focus? Pivoted. Monetary Policy? Pivoted. Even the Democratic National Committee? You guessed it… pivoted.
Investment markets did some pivoting of their own. After reaching a record high in July, the S&P 500 fell 6.5% in the first three trading days of August, placing the index within inches of a correction (defined as a 10% drop from a recent peak). Stocks recovered to near-peak levels by month-end, but then it was déjà vu all over again. In September, stocks declined more than 4% in the first week of the month, but again recovered to close the quarter at a fresh record high.
Despite this volatility, investment markets have performed strongly in 2024, building on healthy gains notched in 2023. Year-to-date, global equities are up nearly 19% led by domestic stocks (+21%) and followed by emerging markets (+17%) and developed international stocks (+13%). Core bonds are up almost 5% over the same period and a balanced portfolio constructed with 60% stocks and 40% bonds has added almost 14% in the first nine months of the year.
Pivoting to the labor market, after adding an average of more than 200K new jobs per month in the first half of the year, payroll gains slowed dramatically, averaging just 115K in July and August. At the same time, the unemployment rate started to climb. After hovering below 4.0% since January 2022, unemployment climbed to 4.3% in July before retreating to 4.2% in August. The September jobs report, due on Friday October 4, is expected to show 150K new jobs and 4.2% unemployment. Throughout the year, we have observed other indications of a softening (but not soft) labor market including continued declines in job openings and decelerating wage growth.
In July, the Fed signaled a pivot for the committee’s focus. Specifically, language in the July Fed statement indicated that the FOMC would be ‘attentive to the risks to both sides of its dual mandate (inflation and labor market)’ compared to ‘highly attentive to inflation risks’ previously. Policymakers left rates unchanged in July but set the table for an initial cut in September.
And cut they did. After raising policy rates from 0.00%-0.25% to 5.25%-5.50% in just sixteen months and holding rates steady for more than a year, Fed policymakers pivoted, cutting interest rates 0.50% in September. While the size of the cut (0.25% or 0.50%) was the topic of much debate, the cut itself was widely anticipated. Looking forward, the updated dot plot indicates plans for 0.25% cuts at each of the two remaining Fed meetings in 2024 and another four 0.25% cuts in 2025 before reaching a terminal rate of 2.75%-3.00% in 2026. For their part, bond traders are pricing in three 0.25% cuts in the fourth quarter and a slightly faster path to reach the estimated terminal/neutral rate.
Lastly, President Biden and the Democratic National Committee also pivoted during the third quarter after a revealing debate performance led the President to step aside from the 2024 presidential race, opening the door for Vice President Kamala Harris. U.S. federal elections are slated for Tuesday, November 5, 2024. Both polls and prediction markets indicate that the presidential contest is too close to call. We recommend clients vote with their ballots next month and be wary of headlines suggesting one candidate or the other will unduly help or harm your portfolio.
Pivoting to the fourth quarter, even a neutral result from the markets would produce 12-month returns investors should be pleased with. We’ll remain focused on the health of the economy, the path of monetary policy, and on the lookout for the unexpected as we head into 2025. Despite an ever-changing landscape, our disciplined approach and long-term orientation serve us well as we endeavor to create comprehensive investment solutions that help our clients reach their financial goals. On behalf of the entire team, thank you for allowing us to serve on your behalf.