October 2024 Commentary

October brought Halloween chills to the markets as pre-election uncertainties nudged the S&P 500 down by -1%. Financials, often overlooked this year, saw gains on strong Q3 earnings from major banks, while mega-cap stocks struggled under valuation concerns and delays in AI-driven returns. On the economic side, the preliminary Q3 GDP growth of 2.8% showed resilience, even though corporate earnings fell short of the S&P’s impressive 21% year-to-date gain.

For many investors, the lead-up to the November 6 election resembled an adult version of trick-or-treating. Some opted to secure profits from this year’s market gains, while others seized the volatility to make speculative bets on the election outcome. While this level of speculation does add to market volatility, economic data remains the best gauge of overall economic health. Increased election-related volatility is anticipated and follows a well-established trend.

However, the real scare came from the bond market. Despite the Fed’s September rate cut, the 10-year Treasury yield climbed from 3.7% in mid-September to 4.2% by late October, dampening hopes for a housing market rebound as 30-year mortgage rates inched closer to 7%. Higher Treasury yields not only curb housing affordability but also add strain to federal debt costs. As we step into November, these pressures set the stage for a cautious close to the year.

In September, the U.S. job market exceeded expectations, signaling strong employment momentum. The Labor Department reported a surge of 254,000 nonfarm payrolls, well above the 150,000 forecast and up from August’s revised 159,000. The unemployment rate ticked down to 4.1%, adding further strength to the labor market narrative. Revisions added 72,000 jobs over the past two months, easing concerns about labor market softness and reinforcing expectations for a cautious pace of Fed rate cuts.

Job growth bolstered wages as well, with average hourly earnings rising by 0.4% in September and up 4% year-over-year, outpacing estimates. However, the average workweek edged down slightly to 34.2 hours. Federal Reserve Chair Jerome Powell noted that, while employment remains "solid," hiring has slowed compared to last year. Despite stable unemployment claims, hiring rates are cooling, with business surveys suggesting firms are maintaining current staffing levels. The Fed remains inclined to continue rate cuts but may proceed more gradually, likely opting for quarter-point moves through year-end.

September’s inflation report brought a mixed bag for investors. Headline inflation eased to 2.4%, slightly down from August’s 2.5% and just above expectations of 2.3%. This marks the sixth consecutive monthly decline in the headline rate, suggesting that the Fed’s strategies to contain price pressures may be gaining traction, strengthening the likelihood of a quarter-point rate cut at its November meeting. For investors, this continued downward trend in headline inflation offers optimism that broader inflationary pressures may be cooling.

However, core inflation, excluding food and energy, rose more than anticipated, reaching 3.3% year-over-year, up from 3.2% in August and surpassing forecasts. This increase points to ongoing price pressures in key areas like housing, healthcare, and durable goods, indicating that inflation remains entrenched in critical segments of the economy. Investors should interpret this core inflation uptick as a sign that the Fed may need to balance rate cuts carefully, monitoring underlying inflation trends closely even as headline numbers improve. With the November 5 presidential election approaching, the Fed faces a delicate decision-making landscape between encouraging economic stability and containing persistent inflationary forces.

With early November concluding one of 2024’s most anticipated market events, the Republican landslide and President-Elect Donald Trump’s return to the Oval Office are set to significantly shape market strategies and sentiment. We’ll delve into these developments in November’s Market Commentary, taking time to reflect on potential policy shifts and their implications for the economy and markets once post-election euphoria—or dysphoria—subsides.

The Conference Board Leading Economic Index® (LEI) for the U.S. dropped by 0.5% in September, landing at 99.7, following a 0.3% dip in August. This marked a cumulative decline of 2.6% over the six months from March to September 2024—steeper than the 2.2% drop recorded in the prior six-month period. The decline underscores ongoing economic headwinds, as key components such as factory new orders, which have been weighed down by the global manufacturing slowdown, continued to underperform.

Continued decline in the LEI may signal the need for a cautious approach, with growth-dependent sectors likely facing headwinds in the months ahead.

According to Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at The Conference Board, persistent weaknesses in factory orders, an inverted yield curve, falling building permits, and a subdued consumer outlook on future business conditions have collectively contributed to the LEI’s decline. These factors overshadowed modest gains in other LEI components, reflecting broader economic uncertainty. For investors, this LEI trend indicates potential sluggishness as we close out 2024, with The Conference Board forecasting only moderate economic growth as we head into early 2025. This

Market expectations suggest that the Fed will continue to lower rates gradually, with another 50 basis points of cuts anticipated by year’s end. For the 2024 stock market rally to persist, equities will need to remain attractive relative to rising bond yields, which may increasingly draw investor attention, and navigate elevated price-to-earnings (P/E) ratios that have reached historically high levels.

As we move into 2025, evolving presidential policies and the impending expiration of the current tax code introduce considerable uncertainties. The potential for higher capital gains taxes could drive a year-end selloff, while substantial deficit reduction may necessitate either cuts to entitlement spending or tax increases—factors likely to impact market sentiment. Regardless of who assumes the presidency, it’s important to remember that Inauguration Day remains two months away, and effects from policy changes, including possible interest rate cuts, take time to be reflected in the economy. In this environment, investors should prioritize companies with compelling valuations and resilient business models less susceptible to shifts in Washington’s policies. Key areas of focus include sectors with limited regulatory exposure, as well as firms with stable cash flows and defensive characteristics to withstand potential market volatility.