Weekly Market Update: October 28, 2024

The Federal Reserve has been effectively navigating its dual mandate. The inflation situation continues to improve, with consumer and, more so, producer prices easing further in September. This continued the steady downward move in the pace of price growth over the summer months. Importantly, the central bank has been able to accomplish this without putting too much pressure on the labor market.

The consensus is that the Fed will cut the federal funds rate by a quarter point, to 4.50%-4.75%, at the next Federal Open Market Committee (FOMC) meeting, which commences on November 6th. With prices and the jobs market coming into better balance of late, the previous calls to cut rates by a half point have dissipated. The labor market has held up well despite the restrictive policies in place since early 2022. Although job creation has been erratic on a month-to-month basis, on average the nation has added an estimated 200,000 jobs per month this year as revised, a pace indicative of a healthy labor market.

The loosening of monetary policies, though, has not put downward pressure on longer-term Treasury yields. In fact, the yield for the benchmark 10-year Treasury note has moved higher since the September reduction by the FOMC in the “fed funds,” or overnight rate. This divergence is in part the product of the Fed still trimming its balance sheet through the sale of mortgage-backed securities and Treasury holdings. Sales take liquidity out of the financial system and put upward pressure on yields. And with bond buyers knowing that the government will need to sell more debt in the future to finance projected deficits, they are not willing to pay high prices at auction. The yield, which moves inversely to price, rises in this scenario.

Meanwhile, a successful start to third-quarter earnings season was headlined by strong results from the financial services sector. The big banks exceeded profit expectations, and their prognostications for the remainder of 2024 were favorable. This was likely needed to justify the stock market’s elevated price-to-earnings mul- tiple entering the season.

Conclusion: As of press time, stocks were performing reasonably well in October, a month that has historically been volatile for equities. With the Fed likely to remain on a rate-cutting path, we think a diversified portfolio consisting mostly of high-quality stocks is warranted.

Source : ValueLine.com