September 2024 Market Commentary

As we close out September, the markets delivered a surprising outcome. Historically, this month tends to be challenging, often marked by market declines. However, this year was different, with both the S&P 500 and Dow Jones reaching new all-time highs. A major catalyst was the Federal Reserve’s unexpected decision to cut interest rates by 50 basis points, its largest move in the current easing cycle. This decision spurred optimism, helping to propel stocks higher as investors adjusted to the more favorable policy environment.

Throughout September, steady equity inflows, which have been ongoing for the past 12 weeks, added to the positive momentum. Economic data also pointed toward the possibility of a “soft landing” scenario, where the economy cools just enough to control inflation without slipping into a recession. While these developments are promising, we remain cautious due to signs that consumer spending may be weakening, particularly among households burdened with higher levels of debt.

Looking ahead to the final quarter of 2024, there are several key factors that will shape the market’s direction. The upcoming presidential election introduces an additional layer of uncertainty, as markets often react to shifts in political outcomes and potential changes in economic policy. At the same time, the ongoing tension between high-growth technology sectors—led by the continued rise of artificial intelligence—and more defensive areas like utilities and defense industries places investors at a crossroads.

September began with concerns over the U.S. labor market, as job openings fell to their lowest level in over three years. This set the tone for what turned out to be a somewhat challenging month for employment data. The August nonfarm payroll report showed an increase of only 142,000 jobs, marking the weakest three-month average in job growth since mid-2020. Moreover, job gains in key sectors such as manufacturing, retail, and information technology were either flat or negative.

While the unemployment rate edged down slightly to 4.2%, this improvement was largely due to a reduction in temporary layoffs, rather than strong job creation. Sectors that have been major contributors to post-pandemic recovery, such as education and healthcare, experienced their smallest hiring increase since 2022. Additionally, private-sector payroll growth fell below 100,000 for the first time since the onset of the pandemic, underscoring the broader slowdown in hiring.

The labor force participation rate held steady at 62.7%, but there was a slight decline among prime-age workers (those between 25 and 54 years old), marking the first drop in this group’s participation since March. Meanwhile, wage growth, while still healthy, has shown signs of moderation. Average hourly earnings rose by 3.8% year-over-year, with production and nonsupervisory workers seeing a 4.1% increase. While these wage gains help sustain household spending, they also reflect a tight labor market, complicating the Federal Reserve’s efforts to balance economic growth with inflation control.

On the inflation front, the August Consumer Price Index (CPI) rose by just 0.2% month-over-month, bringing the year-over-year rate down to 2.5%, the lowest since February 2021. This easing of inflation brings it closer to the Federal Reserve’s 2% target, which is positive news for both consumers and the broader economy. However, core inflation, which excludes more volatile categories such as food and energy, rose slightly more than expected, largely due to shelter and transportation costs.

Despite this, the overall trend toward disinflation remains intact. Fuel and goods prices declined, which helped offset increases in services like rent, airfare, and car insurance. Over the past three months, inflation has trended closer to 2% on an annualized basis, offering reassurance that price pressures are continuing to ease. The drop in headline inflation further strengthens the case for the Federal Reserve’s decision to ease monetary policy.

At its September Federal Open Market Committee (FOMC) meeting, the Federal Reserve surprised markets with a 50-basis-point rate cut, bringing the target range for interest rates down to between 4.75% and 5%. This marked the first instance of rate cuts in four years and was more aggressive than many anticipated. The move reflects the Fed’s shift in focus, as it now sees the cooling labor market as a more pressing concern than inflation, which is gradually moving toward the central bank’s target.

By cutting rates more aggressively, the Fed signaled that it is committed to supporting economic growth and stabilizing the labor market, which has shown signs of slowing. The central bank’s statement noted that inflation is “moving sustainably” toward its 2% goal, indicating increased confidence in the inflation outlook. This shift toward easing monetary policy suggests that the Fed is prepared to take further action if necessary to maintain the current economic expansion.

As we move into the final quarter of 2024, several factors will influence market performance. The Conference Board Leading Economic Index (LEI) declined by 0.2% in August, its sixth consecutive monthly drop, signaling ongoing challenges for economic growth. Over the past six months, the index has fallen by 2.3%, highlighting the headwinds facing the U.S. economy, which include higher interest rates, weaker consumer demand, and eroding confidence.

The persistent decline in the LEI, coupled with a downturn in new orders and stock market volatility in early August, suggests that economic momentum is slowing. However, the Fed’s recent rate cut could provide a cushion, offering support to the economy as it navigates through these challenges.

The upcoming presidential election could further add to market volatility. As we’ve seen in the past, markets tend to react to political uncertainty, and the potential for a tight race or delayed results due to mail-in ballots could create additional turbulence. Historically, markets tend to rebound once election-related uncertainty clears, regardless of the outcome, but in the short term, volatility could increase.

Tech stocks, particularly those involved in AI, continue to be major drivers of market performance. The "MAG-7" stocks have accounted for much of the gains this year, with Nvidia leading the charge in AI-related investments. While the AI revolution holds great promise, we are still in the early stages of widespread adoption. Companies are making significant capital investments in AI, but it will take time to see these investments translate into real productivity and profitability gains.

For investors, it is important to maintain exposure to these large-cap tech stocks while also diversifying into sectors that will benefit from AI-driven innovations over time, such as semiconductors, cloud infrastructure, and software providers. The key will be navigating the volatility that comes with these investments and remaining patient as the broader economy integrates AI technology into its operations.

As we enter the final stretch of the year, staying flexible and prepared for market swings will be critical. The combination of a slowing labor market, moderating inflation, and political uncertainty creates a complex landscape, but it also presents opportunities. By maintaining a balanced approach, investors can position themselves to benefit from both short-term volatility and long-term growth prospects.