Market Note – August 27, 2024

By Hightower Great Lakes on August 27, 2024

Powell’s Increased Confidence

Fed Chair Jerome Powell lived up to the dovish expectations about monetary policy changes last Friday in Jackson Hole, Wyoming.

Specifically, he said “The time has come for policy to adjust,” – meaning the committee is ready to begin cutting interest rates in September as inflation has come down close to their 2% target and the labor market is softening.[1]

Inflation is well on its way to the Fed’s 2% goal. The labor market has also come into better balance, with 1.2 job openings per unemployed person, down from a 2:1 ratio during peak inflation in the summer of 2022.

It is clear that monthly job gains have slowed, and initial jobless claims are above recent lows. Powell said that the Fed can now shift its focus to the other side of its dual mandate, maximizing employment, and that the committee does not seek or welcome further cooling of the labor market.

Powell also spoke on the current level of the Fed’s policy rate, and said its range gives them, “ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”[2]

The probability of a 50 bp cut in September rose following the speech to 38% from 24% on Thursday. Markets are expecting 100 bps of cuts by the end of 2024, across three total FOMC meetings in September, November, and December.

It is important to note that the Fed’s November meeting falls on November 7, just two days after the U.S. presidential election. Looking forward, markets are pricing in 200 bps worth of cuts by next summer, which would place the Fed Funds Rate at a range of 3.25-3.50%.

It is somewhat unprecedented for the Fed to ease its monetary policy without significant deterioration in the economic outlook. Durable orders expanded +9.9% in July, JOLTS data shows layoffs at record-low levels, and we are at the beginning of a housing cycle.

We will receive a July personal consumption expenditure (PCE) inflation figure later this week, which could further motivate the Fed’s policy shift.

Chart 1: The Economy has Come into Balance, with Cooling Inflation and Better Supply and Demand Levels in the Labor Market[3]

A Constructive Outlook

The S&P 500 is up over 9.8% since the growth scare on August 5, largely in part due to better-than-expected economic data. Investors were spooked after the hot initial jobless claims and weaker July nonfarm payroll report in the first week of August.

Since then, initial jobless claims have come in lower than expected with a four-week moving average of 240K, well below recessionary levels of 350-375k.

U.S. GDP appears to be growing by 2-2.5%, with ISM services recently beating estimates and in expansion with new orders and employment trends also strong.

Retail sales from the government came in 4x expectations and individual consumer companies posted stronger than expected results: Walmart (WMT) same-store sales (SSS) grew 4.2%, Target (TGT) SSS rose 2% with 3% traffic growth, TJX’s Marmaxx division SSS rose 5% and their HomeGoods segment showed 2% SSS growth.

Altogether, in the second quarter corporate earnings grew ~10% y/y and companies appear to be in a healthy position. With rate cuts on the horizon, further growth should be expected.

There are opportunities hiding in plain sight. An improving retail backdrop and lower interest rate environment should strengthen real estate – especially at discounted valuations.

Apathy is also being seen across energy and commodity sectors, reflected in valuations. Meanwhile, technology names, including IBM, continue to strategically diversify resources away from China and towards India and other geographies.

Strong capex trends are propelling broad growth and opportunities – we expect this will continue to improve with a normalizing yield curve environment.

We continue to believe in broader participation in the equity markets into other sectors beyond technology and communication services like financials, energy, industrials, materials, consumer discretionary, and housing. In other words, we believe the 493 stocks beyond the Magnificent 7 will catch up throughout the remainder of the year – that is where our equity portfolios are positioned.

Fixed Income

The Treasury curve rallied last week as the 2-, 10-, & 30 yr yields fell by 13, 8, 5 bps respectively. Month-to-date, the 2-, 10-, & 30 yr yields are down by 34, 23, & 21 bps as the market anticipates a Fed pivot starting in September.

Fed Chair Powell spoke at the Annual Jackson Hole Economic Symposium on Friday and in his remarks, he stated that he believes that the time has come for policy to adjust as his confidence has grown that inflation is on a sustainable path back to 2%.

Powell seemed to cement a Fed cut at the September meeting but left the door open to the size of the cut stating, “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks”.

Currently, market participants are pricing in 100 bps worth of cuts over the final next three FOMC meetings of the year. By this time next year, market participants are predicting the Fed Funds rate to be at 3.50% or eight cuts over the next eight FOMC meetings.

U.S. credit ratings deteriorated last week as the main rating agencies issued 54 downgrades and 28 upgrades. Financials had the most downgrades, while Consumer Discretionary had the most upgrades. High-yield issuers led the downgrades with 28. U.S. investment grade corporate spreads finished flat on the week at +133 bp. High yield spreads tightened 6 bps to +369.

The Week Ahead

Earnings – Wednesday: BBWI, COO, CRM, CRWD, HPQ, NTAP, NVDA, SJM; Thursday: ADSK, BBY, BF.B, CPB, DG, LULU, ULTA.

Economics – Monday: Durable Orders, Durable Shipments; Tuesday: FHFA Home Price Index, Consumer Confidence; Thursday: Q2 GDP (Second Preliminary), Wholesale Inventories, Pending Home Sales; Friday: Personal Consumption Expenditures, Personal Income, Michigan Sentiment.

Return for Selected Indices^[4]

Click here to read last week’s Market Note (8/20).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: CNBC. As of August 23, 2024.

[2] Source: Bloomberg. As of August 23, 2024.

[3] Source: Bloomberg. As of August 23, 2024.

[4] Source: Bloomberg. As of August 26, 2024.