Heading into the last quarter of the year, the US economy sent out several strong signals that is remains resilient and robust. Third quarter inflation continued a downward trend, with annualized numbers beginning to approach the Central Bank’s target. But softening of the job market over the summer months put additional pressure on the Fed to begin cutting interest rates after several sessions of remaining in “pause.”
After a brief period of anxiety with calls for emergency action, the Fed finally enacted a 50-basis point rate cut at its regular September meeting, while hinting about possible additional cuts before the end of the year and into next.
Interest Rate Cut
The long-awaited decision to begin cutting rates helped push what had been a volatile stock market to new historic highs with a rally many forecasters now believe has a chance of enduring through the last two and half months of the year.
A surprising September labor report, with 254,000 jobs added, blew past expectations. Strong GDP growth of 3.0% in the second quarter, plus an upward revision to 1.6% in the first quarter of the year, helped ease many concerns. It took some of the urgency out of the Fed’s need to rush into further rate cuts and convinced many analysts that the Fed had accomplished the elusive goal many skeptics had doubted: a soft economic landing.
Inflation
The year-over-year inflation rate dipped from 3% in July to 2.9% in August, and 2.5% in September. The most noticeable drop has been seen at the gas pump. The national average the first week of October was down to $3.17 per gallon, a drop of nearly 20% over the same time last year. Lower demand from consumers still dealing with the effects of inflation plus less post-summer driving overall helped bring prices down. Hurricane season and troubles in the Mideast are two possible tailwinds that could impact the price of oil in the next few months. Food prices have also seen relief, but housing costs remain stubbornly high.
Jobs Report
After two disappointing jobs reports in July and August, a surprising September jobs report helped reassure market analysts and the Fed that the US economy is still strong. While it stemmed initial worries that the Fed had waited too long to begin cutting interest rates, it also eased some of the pressure on the Fed to take stronger action more rapidly. In the past, a robust jobs number had fueled worries that the economy was too hot and that inflation might rebound. With the first round of rate cuts announced and more expected, a sense of optimism has returned.
Stock Market
Stocks have once again hit record highs going into the fourth quarter, as they continue to post gains and losses. The S&P 500 finished September at a record high and posted an overall return of 2.1%, the index’s tenth positive month out of the past eleven. A modest rally the first few days of October set an overall hopeful and positive tone for the rest of the quarter.
Consumer Spending
One area of the economy that has remained healthy is the willingness of consumers to spend. It accounts for two-thirds of the GDP and has prevailed despite the challenges of high prices, high credit card interest, and more expensive borrowing costs. Retailers are complying with the demand for more discounts and more price-sensitive consumer behavior as inflation eases. Earlier holiday promotions are expected to augment fairly optimistic retail forecasts for the last two months of the year. Modest gains of around 3% are being forecast by merchants, with larger gains among online purchases.
Looking Forward
Concerns that remain as we move through the last three months of the year are political headlines, the upcoming election and its aftermath, geopolitical tensions, short-term investor anxiety, the potential for market volatility, and slower growth forecasts. Offsetting these should be additional rate cuts by the Fed, inflation continuing to trend downward, recession fears receding, and a positive quarter for consumer spending.
The Lesko Investment Committee believes that markets could be getting a bit “stretched” as major indices continue to meet all-time highs. If markets stretch too far in Q4, we run the risk of taking gains from future years (2025/2026). With that risk in mind, it’s a great time to review and assess your investment goals and tolerance for risk. It may also be a good time to take some profits from some of the biggest winners this year and reallocate them to reduce risk. We can help you balance and diversify, fine-tune your tax strategies, review risk and asset allocation, and talk through any questions or concerns you have. We look forward to serving you as we enjoy the active fall season and prepare for the year ahead.