October Macroeconomic Update

Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer

A surprising Federal Open Market Committee decision to cut rates by fifty basis points in late September has U.S. financial markets booming a month later. Unfazed by a turbulent start to October that included port strikes, hurricanes, and an Iran-Israel conflict escalation, investors are optimistic about the direction of this surging U.S. economy. Initial worries that the Fed acted too soon have been drowned out by a great jobs report and stable inflation. According to a quarterly Wall Street Journal survey of sixty-six economists, the probability of a recession occurring in the next 12 months is down to about 25%. For context, this same WSJ survey of economists in October 2023 predicted about a 50% chance that a recession would occur this past year. Whether we simply dodged a 50/50 bullet in the last 12 months or not, economists are beginning to lean toward the likelihood that Fed strategy will cause a soft landing instead of a hard one.

A recent Bureau of Labor Statistics employment report shows that 254,000 jobs were added in September, while the July and August jobs reports were revised upward by 55,000 and 17,000, respectively. Most of these employment gains have been made in food services and drinking places, health care, government, social assistance, and construction. The overall unemployment rate ticked down to 4.1%, still well below the U.S. long term average unemployment rate of 5.69%.

The BLS also releases a monthly Consumer Price Index report, the most widely used measure for inflation. The report for September showed that the all-items price index increased by 0.2%, which was the same as in August and July. For the 12 months ending in September, prices have risen by 2.4% in the all-items index. This is good news for a Fed that is hoping to see inflation slowly wind its way down to an annual target rate of 2%. Energy and medical care commodities were the only sectors that experienced deflation, but sectors that have experienced notoriously high inflation this year cooled off a little last month. The shelter price index only rose 0.2%, compared to a 0.5% increase in August. In the 12 months ended September 2024, Shelter (4.9% increase) and transportation services (8.5% increase) have been the largest drivers of upside inflation this year.

According to the Atlanta Fed’s GDPNow model, estimates for Q3 2024 GDP growth are reading in at approximately 3.4%. The advance estimate and most reliable measurement of Q3 GDP growth will be released on October 30th by the Bureau of Economic Analysis, but even the lowest forecasts from private economists suggest that the recent trend of stable GDP growth (since Q3 2022) will continue through the end of the year. Growth appears to be defying economists’ expectations once more, but this could result in more upside risk for an inflation figure that is currently under control.

​There are several areas to consider when making investment decisions in this new interest rate environment. SMID-cap companies (market capitalization of $20 billion or lower) should have more breathing room to spend and grow because the cost of borrowing will fall as rates do. This has certainly been reflected in the breakout performance of the Russell 2000 small cap index over the past month. However, investors should be selective when analyzing small or mid-cap companies and their valuations. Rate cuts have also created a favorable environment for the traditional 60-40 (stocks and bonds) portfolio allocation. Stocks and bonds are both attractive avenues for investment right now because of soft-landing expectations. If the soft landing scenario occurs and the economy does cool down without a recession, both asset classes will benefit.

Sources:
https://www.bls.gov
https://www.capitalgroup.com/advisor/insights/articles/where-consider-investing-interest-rates-fall.html?
 https://www.atlantafed.org/cqer/research/gdpnow
https://www.wsj.com/economy/economists-predictions-survey-charts-68ba82d6?mod=central-banking_more_article_pos11