Weekly Market Update: September 3, 2024

The Federal Reserve is expected to reduce the benchmark short-term interest rate at this month’s monetary policy meeting. During the annual Jackson Hole Economic Symposium in late August, Fed Chairman Jerome Powell said the central bank is confident that inflation is on a sustainable path to its target rate of 2%. Recent price data, including the first below 3% year-over-year increase in the Consumer Price Index since 2021, appear to be the green light the Federal Reserve needed to start reducing the federal funds rate. Subscribers should note the Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Fed, was scheduled to be released shortly after we went to press.

The time appears right to ease off the monetary brakes. Under Chairman Powell’s leadership, the Federal Open Market Committee (FOMC) raised the federal funds rate to its highest level in 23 years in an effort to tame price inflation that hit a four-decade high in 2022. But with inflation headed lower, the central bank must now protect the labor market. If job creation were to falter notably, it would likely put pressure on the consumer sector and make the possibility of a “soft” economic landing less likely. A sharp downward adjustment of 818,000 jobs to the March, 2024 total non-farm employment figure, and the continued uptick in the unemployment rate suggest some building stress in the labor market.

Meanwhile, the recent economic reports have been uneven. Although the economy is showing signs of slowing after a solid performance in the second quarter, the odds of a near-term recession remain low according to forecasts from the big money center banks. True, residential construction slowed in July, but the consumer is still spending, reflected by gains in July retail sales, durable goods orders, and new home sales. On point, The Conference Board’s Consumer Confidence Index exceeded forecasts in August.

Conclusion: The likelihood of an interest rate cut at the next FOMC meeting may provide support for stocks this September, a month that historically has been the worst for equities. However, with economic and geopolitical concerns lingering and price-to-earnings multiples elevated, a portfolio consisting mostly of high quality stocks may be the best near-term investment strategy.

Source: ValueLine.com