Market Recap 9/20/2024

September 20 Snipit

 

Going into Wednesday’s Fed meeting opinions were equally split.   You could find compelling reasoning for why a quarter-point cut was the way to go, and equally compelling arguments for a half-point cut.  Heck, some analysts made a good case that cutting rates was a mistake.  But Powell and company seem to subscribe to the mantra of ‘go big or go home.’  A half-point it is!!  

 

Image

 

Economists being economists, only 9 out of the 101 economists surveyed before the meeting thought we’d see such a large reduction.  But probably more surprising than the half-point cut was what the Fed told us about future policy changes.  Two key points here:

 

  • They expect to cut rates by another half-point by year-end.

 

  • On average the committee members see another full 100bps of cuts in 2025.  

 

But the Fed members are all over the board individually.   As you can see from the range of estimates in 2025, two board members see rates under 3%, while one member is penciling in a 4.25% rate.  

 

Image

 

The policy debate will roll on, as it always does, with the focus now shifting to the size of the reductions in 2025.  As we noted last week, it will really all be about employment.  The key comment from Wednesday’s announcement was:

 

“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance, and (the FOMC) is strongly committed to supporting maximum employment…” 

 

As Powell noted in his press conference, the slowdown in the labor market “bears watching, and we’re watching.”

 

Market Implications?

 

The natural question then is what do rate cuts mean for the markets?   At a high level, history tells a mixed tale.  The chart below from Morgan Stanley shows the S&P 500 performance after the first rate cut going back to 1973.  

 

 

Something for everyone!!   It’s really a question of whether the economy falls into a recession after the first rate cut or not.  Not exactly rocket science.

 

On this score the current data is favorable.   The latest unemployment claims numbers have improved modestly….

 

A graph showing a number of dataDescription automatically generated with medium confidence

 

….and the tracking estimate for third-quarter growth is running at +3.0%.  

 

A graph showing the growth of the stock marketDescription automatically generated

 

Hardly recessionary stuff….but we shall see.

 

Let’s close with the following chart from TheMacroTourist.  It shows asset class performance sixty days after the first rate cut in both a no-recession and a recession scenario.   

 

A graph with different colored barsDescription automatically generated with medium confidence

 

This chart proves that averages can be dangerous!!

 

(Other) Charts We Found Interesting

 

  1. The bearish contingent argues that the Fed only starts cutting rates right before a recession starts.   Well, the history here is a little more complicated.  As with everything in economics, it depends.

 

A graph of a graph showing the rate cutsDescription automatically generated with medium confidence

  

  1. I’m finding there aren’t many advantages to getting old, but when I look at the chart above, I can’t help but notice that the 1998 easing cycle is missing.  The Fed was heavily criticized for stoking the flames of the tech bubble with these rate cuts, but at the time it felt like the global economy was on the cusp of a crisis.

 

QuantVue on X: "@charliebilello The collapse of hedge fund Long Term  Capital Management in 1998, “ caused Fed easing and liquidity routed into  the new secular growth theme of AI,” much like

 

  1. If we avoid a recession over the next twelve months could we still see additional rate cuts?  It’s certainly possible – real (inflation-adjusted) rates are relatively high.

 

A screen shot of a graphDescription automatically generated

 

  1. On Friday we learned that Constellation Energy plans to restart the Three Mile Island nuclear plant.  Microsoft will use the power generated over the next 20 years to feed its data centers/AI initiative.  Why restart an old plant rather than build a new one?   The cost to build nuclear in the U.S. is astronomical!!

 

Image

 

  1. Circling back to the labor market again.  While the headline jobs figures tell a mixed tale, there’s no question that hiring in tech is weak.  

 

Image

 

  1. When should you take Social Security?   A chart from J.P. Morgan’s Guide to Retirement illustrates the tradeoffs.

 

A screenshot of a computer screenDescription automatically generated

 

  1. How long until daytime power in Texas is basically free?  

 



Have a good weekend

 

Charles Blankley 
Principal
Chief Investment Officer
Gemmer Asset Management LLC

 

Published by Gemmer Asset Management LLC. The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.