September 2024 - Market Update

The Friedenthal Team

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Key Observations

In September, we saw the US Federal Reserve hop on the rate-cut wagon, with a cut of 50bps. Despite initial skepticism on the Fed’s motivation for a jumbo cut, markets reacted positively with the S&P 500 ending September up 2.14% over the Aug-30 close.
Bonds benefited from the yield curve declining across the board, returning US Aggregate bonds up 1.34% for the month.
The People’s Bank of China also surprised with a series of economic stimuli to boost the country’s lagging economy in the aftermath of COVID 19. Chinese stocks have since rallied substantially in response.
The overall economic outlook remains positive, with a resilient labor market and consumption, GDP at 3.0% YOY, and inflation moving closer to target.

Data Dashboard

Stock Market

The S&P 500 Equal Weight Index (our preferred benchmark) was up 2.27% in September. The best performing sectors were Consumer Discretionary & Utilities, both enjoying tailwinds from the Fed’s jumbo rate cut. Healthcare was the worst performing sector, dropping 1.66%.

Chinese stocks rallied an incredible 25% after Beijing announced its biggest economic stimulus since the global pandemic.

Consumer Discretionary stocks have been under pressure for a while, with the US consumer making increasingly cost-conscious purchases. Automakers have taken the brunt of this cycle, with sales volumes & margins declining. Amidst a messy vehicle recall & weaker demand guidance, Jeep-maker Stellantis saw shares drop 13% on Sep-30. Investors are eagerly awaiting the delivery reports from Tesla, which is up almost 25% for the quarter.

Airlines have also been struggling, with slowing consumer demand and a consistent pattern of seat oversupply. On Sept-23, American Airlines dropped out of the S&P 500 after being a part of the index for 9 years.

September Monthly Returns (by US Sector)

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Bond Market

Bonds prices rose overall in September, however the longer term 10Y &30Y treasury yields actually rose after the Fed announced rate cuts. Historically, aside from the emergency COVID rate reductions, the last time the Fed cut rates by 50bps was in the 2008 financial crisis. Some market participants likely believe that the Sept 18 cut was a bearish sign from the Fed. Corporate earnings, GDP growth & consumer spending indicate otherwise.

High yield spreads (the extra yield you get for buying lower quality bonds) saw very little movement in August, and remain historically tight. Fed interest rate cuts will likely lead to lower corporate borrowing costs, as long as the spread remains low as it has for some time.

The implied inflation rate in the Treasury Inflation Protected Securities (TIPS) market hit a low in mid-September, showing a 5-year breakeven of 1.88% per year. That rate increased into the end of the month, finishing at 2.08%. The breakeven rate is observable because TIPS (US Government Bonds with an inflation adjustment) have their principal adjusted annually by the inflation rate.

Economics

The Core CPI (inflation index excluding food and energy) remained at 3.2% YoY for August, while CPI (including food and energy) dropped to 2.5% from 2.9% in July. The labor market added 142k jobs in August, with unemployment dipping to 4.2%. We are moving into an environment of growing disinflation (lower positive inflation), softer spending growth, moderating wage growth & declining rent inflation.

The Fed’s statement signaled balanced risk to the dual mandate (price stability and maximum employment) and is now more focused on the employment component & the general state of the economy, rather than combating inflation.

Markets are now pricing in total cuts between 50 & 75bp in the Federal Funds Rate before the end of the year.

September Economic Dashboard

Tactical Trades

Our tactical stock portfolio maintained overweight positions in Real Estate & Financials, and underweight in Utilities.

Our tactical ETF portfolio remained unchanged in September. For fixed income, we have added exposure to Emerging Market bonds & Preferred Equities.

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As always, please reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team