September saw strong performance across most asset classes with the exception of certain alternative sectors. The start of a rate-cutting cycle, highlighted by an aggressive 50-basis-point reduction in the federal funds rate, boosted market sentiment. This fueled optimism in equities, pushing the S&P 500 to new all-time highs, reflecting increased confidence in the economic outlook. However, new developments in domestic and geo-political dynamics may threaten this positive outlook.
“The decision to opt for the more aggressive [50 basis point] cut signals that the Fed now perceives the labor market as a greater risk to its dual mandate, with concerns shifting more towards employment than inflation.”
In September, the Personal Consumption Expenditures (PCE) report continued to show stability in inflation metrics, maintaining last month’s trend. Both Headline PCE and Core PCE remained relatively steady in year-over-year price growth, with Headline PCE declining from 2.45% to 2.24% and Core PCE increasing marginally from 2.65% to 2.68%. The month-over-month change in Core PCE continues to show encouraging signs, coming in at just 0.13%. As we have mentioned several times this year, month-to-month data can be volatile, and thus we turn to the three-month annualized figure to gain a clearer picture of the current trend. The three-month Core PCE inflation rate shows an annualized rate of 2.06%, just barely above the Fed’s 2.00% target.
At the September 2024 FOMC meeting, the Federal Reserve lowered the target federal funds rate by 50 basis points, a move that came amid a divided analyst forecast, with some expecting a 25 basis point cut and others predicting the larger 50-basis point reduction. The decision to opt for the more aggressive cut signals that the Fed now perceives the labor market as a greater risk to its dual mandate, with concerns shifting more towards employment than inflation.
The easing of monetary policy is likely intended to support economic growth and stabilize a labor market that has shown signs of slowing in recent months. With core PCE inflation aligning more closely with the Fed’s 2% target, the central bank appears to have gained confidence that its battle against inflation is nearing its conclusion. This is further emphasized by the FOMC’s statement that the committee has “gained greater confidence that inflation is moving sustainably towards two percent.“1
Investors welcomed the Federal Reserve’s rate policy decision, as the S&P 500 rose to a record high on the last day of the month. However, the forward four-quarter price-to-earnings (PE) ratio of the index is now trading above 22 times, signaling rich valuations and heightened expectations for future growth and reduced perceived risk.
At the same time, domestic and geo-political developments are beginning to pose a threat to the newfound economic optimism. Concerns are mounting over disruptions at East Coast and Gulf Coast ports due to the strike by nearly 50,000 members of the International Longshoremen’s Association (ILA). The halt in the flow of essential goods—including consumer products, industrial materials, and perishable items—could have significant economic implications. Supply chain bottlenecks may drive prices higher, adding to inflationary pressures. While the Fed’s rate cuts have been a positive signal for the market, this strike complicates the outlook. Prolonged disruptions could lead to shortages and production delays, affecting corporate earnings and slowing the broader economic recovery just as inflation was showing signs of stabilizing. Markets will be closely monitoring the situation, as the strike could dampen optimism surrounding recent monetary easing.
Turning abroad, Israel’s ground incursion into southern Lebanon has heightened tensions in the Middle East, with markets closely monitoring a broader conflict involving Hezbollah and Iran. The Israeli Defense Forces launched targeted ground raids, supported by air and artillery strikes, aimed at neutralizing immediate threats near the Lebanon-Israel border. Subsequently, Iran fired at least 180 missiles into Israel on Tuesday October 1st, marking a significant escalation in the ongoing conflict and raising fears of a region-wide war. Iran described this missile barrage as retaliation for the severe strikes Israel has inflicted on the Iran-backed militant group Hezbollah in Lebanon, which has been firing rockets into Israel since the war in Gaza began.
These developments have caused oil prices to surge, with Brent crude oil rising over 3%, likely due to concerns about potential disruptions to energy supplies. Any escalation in the conflict could exacerbate inflationary pressures and complicate the economic outlook, particularly as markets consider the effects of prolonged hostilities on global trade and energy markets.
1. https://www.federalreserve.gov/newsevents/pressreleases/monetary20240918a.htm
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Your Smarter Way Portfolio Management Team
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