Author: esquillace@215marketing.com

October 4, 2024

Financial markets defied typical September weakness – often the worst-performing period of the year – to conclude a winning month and quarter. The S&P500 closed at a record level, gaining 2.1% to post its first positive September in five years. The bellwether index has now risen a fourth consecutive quarter and has delivered the best start to a year (22%) since 1997. Although markets endured a rough start to the historically weak month, investors were able to climb the wall of worry and push the indices higher, mostly on the back of an interest rate cut domestically and massive Chinese stimulus internationally.

All eyes were on the Federal Reserve, and the bank did not disappoint. The committee cut short-term interest rates by an outsized 0.5%, dialing back restrictive monetary policy as it sees inflation clearly within the crosshairs of its 2% target. Additionally, the Fed noted minor weakness in the labor market, with the unemployment rate slowly rising over the past 12 months. Accordingly, Chair Powell declared that “the balance of risks” between inflation and employment “are now even,” and thus began what appears to be the slow recalibration of monetary policy to something more “normal.” The market anticipates at least another 0.25-0.5% of cuts this year, with the next Committee meeting scheduled for November 18th.

Overseas, China took center stage as the government threw about any measure of stimulus possible against the wall. Responding to economic indicators that remain bleak, China announced a broad range of aggressive stimulus measures designed to inject liquidity into the economy and raise the country’s real GDP output. The Chinese stock market reacted instantly, ripping higher with the Shenzen 300 Index rallying 25% over the next several trading days. To end the quarter, mainland Chinese stocks turned in their best day in 16 years (up 8%) and capped a nine-day winning streak after key economic data came in better than expected. While the effects of this stimulus will take time to fully work their way through the system, the short-term reaction has been to ignite momentum overseas and contribute to the risk-on posture in global equity markets. What they threw seems to have stuck. For now.

Strength in precious metals also made headlines during the month. Physical gold prices stormed 6% higher in September, notching multiple record highs and posting the best quarter for the “barbarous relic” in more than eight years. After numerous daily record highs, bullion ended the month at $2,668 per ounce and continues to lead commodities this year. This is unsurprising, as gold and other metals tend to benefit in response to declines in interest rates (see paragraph 2) and inflationary conditions (see paragraph 3). Investor concerns over escalating geopolitical tension, notably in the volatile Middle East region, also helped the safe haven commodity’s surge higher. Silver, not to be outdone, delivered an even more impressive rally, gaining 9.5% on the month.

Looking forward and given the blistering performance in recent months, we would not be surprised to see some price consolidation as the market catches its breath after so much sprinting. Given the year-to-date gain in the broad markets, the S&P500 is now somewhat richly valued and is trading around 21.5x forward earnings. There is the possibility that prices could retrench in the fourth quarter, particularly when considering tense relations among the major Middle East players and an uncertain picture around the US presidential election, now just barely one month down the road. Lastly, in a major development which has received little coverage in the mainstream press, dockworkers in major US port have begun to strike, which was unforeseen until recently and which could have lasting negative economic implications if that situation were to drag on or become worse.

Nevertheless, the more intermediate-term picture is characterized by cheap energy, policy stimulus at home and abroad, and corporate earnings which are projected to grow modestly. This all feels positive for global markets, but we may be forced to contend with short-term volatility as some of the more dubious factors sort themselves out in the coming weeks.

We wish you a great first full month of fall, and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies

September 13, 2024

After hitting all-time highs in July, cracks began to appear during the month of August. The unofficial last summer month began with a ferocious sell-off, resulting in the S&P500 dropping 6% during the first three days alone and the Magnificent 7 falling almost 10% during the same period. It was the worst start to a month in over 20 years and was owed largely to growth concerns after the July payrolls report came in much lighter than expected. Other key pieces of data suggested that the economy is softening, and the Federal Reserve has kept interest rates too high for too long. Contagion in Japan related to its currency and interest rate contributed to the sour mood and elevated volatility, with the VIX spiking to its third-highest level ever seen. Not a fun start. 

Yet in just 11 trading days following that steep decline, the market fully recovered and ascended toward the record July peaks. This rally was based on stronger-than-expected economic data combined with the near-guarantee of interest rate cuts in the coming months. Throughout August, the Federal Reserve signaled that it would likely cut interest rates in September – with recession risks low and core inflation in line with expectations. During his highly anticipated speech in Jackson Hole, Fed Chair Powell confirmed that he was confidant in the directionality of inflation data and would shift the emphasis to supporting the labor market and therefore “adjusting” monetary policy. Essentially, he said that inflation has been tamed and it is time to start reducing market interest rates. Both stock and bond markets rallied aggressively as a result.

Chair Powell is not wrong. The US economy indeed remains modestly strong. While unemployment did tick up in July, it is still low by historical standards and when combined with decent GDP growth and moderating inflation, it does appear that the economy is primed for the coveted soft-landing scenario. The above economic data, combined with the widespread view that monetary policy is far too restrictive, suggest that the Federal Open Market Committee will reduce its benchmark rate by 0.25% in September, followed by a further 0.25-0.5% by year-end. Given the political elements involving the November election, it is unlikely that Chair Powell or the committee will deliver any surprises here. We believe the committee will stick to the script whilst simultaneously remaining data dependent. Rate cuts, here we come!

Looking forward, we are heading into a seasonally challenging time, with September being the most volatile month of the year historically. Over the last five years, the S&P500 has delivered a negative average return of -4.2% during month number nine. Perhaps this time is different with an interest rate cut due on the 18th. Certainly, the market is saying as much, with the odds of a September cut approaching 100% in betting markets. The question becomes: will it be a 0.25% or a 0.5% reduction? The possibility of a 50bps cut remains on the table if certain key economic reports, namely jobless claims and nonfarm payrolls, do not meet expectations. We also must contend with “triple witching” on the 20th (derivative expirations on options, index futures, etc.) as well as the November election, which has begun to loom large.

Given the above combined with a seasonally weak time period, we would not be surprised to see additional volatility in both stock and bond markets. That being said, we are positioned for whatever the market will throw at us, and we stand ready to react accordingly. As ever, we thank you for your ongoing trust and support.