Written by Michael Kutch, on 10/23/2024
The economic data released in the month of August and September was consistent with a slowing US economy. The pace of the declaration was enough to give us some uncertainty surrounding the health of the economy, which has been quite resilient over the past eighteen months. The Federal Reserve appeared to have similar concerns represented by their larger than typical rate cut to begin reducing the restriction on the economy. Fast forward to October, and the picture seems much different. The labor market regained its strength with the headline payroll number coming in a hundred thousand above consensus, along with cumulative revisions to the prior two months of seventy-two thousand. This single print brought the three-month average from around one hundred and sixteen thousand to approximately one hundred and eighty-five thousand. Beyond the labor market, the ISM Services Index moved further into expansionary territory printing its highest level since February 2023. Retail sales came in marginally above expectations, accelerating from last months number. The control group which feeds into GDP came in even stronger at .7% for the month, bringing the Atlanta Fed’s GDP now forecast to 3.4% for the third quarter.
With the improvement in the economy over the last month, some may argue that it may have been a mistake for the Fed to cut their target rate by .50%, however I still believe it was the right decision. We continue to see weakness in many areas of the economy that are more sensitive to higher interest rates such as housing and manufacturing. The longer the Fed stays at a high level of restrictiveness, the greater likelihood of something breaking. Although I agree with their move last month, I now see the case for a slower pace in upcoming meetings. If the data stays consistent with recent readings, December could very well be the next rate cut, skipping their November meeting which is scheduled for the two days following the US Presidential election.
It's really hard to believe that the election is now two weeks away, you wouldn’t know it by the calmness in the equity market which typically experiences a pullback in the month(s) leading up to it. We have seen shifts in leadership depending on which candidate has tracked better in recent polls, however the market as a whole remains unusually calm. Perhaps the reason for that is the higher likelihood of a divided government. It appears to be a low probability scenario that either party is able to control both the executive and legislative branches, which is typically a good outcome for the equity market. Historical data suggests that the equity market can perform well under either party’s leadership, it’s really more dependent on earnings and the economic setup.
The S&P 500 has been grinding to new highs of late, marking one of the best starts to the year dating back to the late nineties. We have seen some improvement in our momentum indicators; however, they have not entered overbought levels, which is something normally seen in healthy up-markets. So far about 80% of S&P companies that have reported have exceeded their earnings estimates, which slightly outpaces the five-year average. Positive earnings could fuel additional gains in the stock market, however upside in the near term may be limited. Valuations are very elevated, and the market is pricing in a lot of good news at its current level. I’m not calling for a large drawdown but think a consolidation period or modest pullback could occur over the next month. If the data continues the way it’s been this month, it should continue to be a buyable dip.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted.