Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of September.
GLOBAL
TRENDS
The global economy continues to grapple with restrictive monetary policies due to persistent, yet improving, inflation. Short-term interest rates from most of world’s largest central banks are at the highest levels observed over the last decade, adding pressure to the global financial system. Some cost of capital relief may be on the horizon as many developed market central banks are guiding to easing conditions soon.
Additionally, geopolitical conflicts in Western Europe and the Middle East have added to economic uncertainty and financial market volatility.
Persistent worldwide inflation, geopolitical unrest, and restrictive central bank policy actions are topics that the Investment Management Group is monitoring. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. This is likely to continue in the second half of 2024, though at a slower rate than historical norms.
CENTRAL BANK
POLICIES
The Federal Open Market Committee (FOMC) last met on July 31st and held interest rates unchanged leaving their target range for the Federal Funds rate at 5.25%-5.50%. In a prepared statement by the Federal Reserve, it was noted that inflation has had “… further progress toward the Committee’s 2 percent inflation objective.” Despite the progress, the statement from July noted that the Committee is seeking “greater confidence” before cutting interest rates.
On August 23rd Federal Reserve Chairman Jerome Powell spoke at Jackson Hole, Wyoming and noted that: “My confidence has grown that inflation is on a sustainable path back to 2 percent.” Powell continued by saying that “The time has come for policy to adjust.” Investors now expect four 25 basis point interest rate cuts through year-end 2024.
The European Central Bank (ECB) last met on July 18th and held their interest rates steady after cutting their target interest rate by 25 basis points in June. In a prepared statement it was noted that future decisions will be: “… based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.” At the end of August, market participants expect two additional 25 basis point cuts from the ECB through year-end 2024.
EQUITY
PERFORMANCE
After a surge in volatility, and an initial drop in equities early in the month, global equities rebounded and ended August mostly positive. Domestically, larger companies outperformed smaller companies, with the S&P 500 outperforming the Russell 2500. Within the S&P 500, sector returns were mostly positive with nine sectors posting positive returns, with Consumer Stables, Real Estate, and Healthcare surging ahead by over 5.0% in August. Two sectors posted losses with Energy lagging all other sectors retreating 1.7% this past month.
Second quarter earnings season for the S&P 500 is almost compete, with over 98% of the index having reported financial results as of August 31st, 2024. Results are mostly positive with over 70% of companies that have reported showing actual earnings growth when compared to last year’s second quarter. Additionally, the S&P 500 is currently on pace to see actual earnings growth at 11.4% when compared to last year’s second quarter figures. This makes the fourth quarter in a row of actual earnings growth for the S&P 500.
The S&P 500 Index rose by 2.4% in August. The blue-chip Dow Jones Industrial Average gained 2.0% over the month. The tech heavy NASDAQ Composite rose by 0.7%. International stocks moved higher with the MSCI All Country World Index of developing and developed market stocks returning 2.6% in August. The MSCI Emerging Market Index rose by 1.6% in August. The MSCI EAFE Index of developed international equities gained 3.3% in August.
INTEREST RATES
AND GROWTH
On August 29th second quarter U.S. GDP was revised higher to 3.0%, above expectations, and well above first quarter’s 1.4% growth rate. The report detailed a strong and resilient U.S. consumer with personal consumption contributing 2.0% of the growth in the U.S. Economy in the second quarter.
At this past June’s FOMC meeting the Fed released an update on their Summary of Economic Projections which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested higher inflation projections for 2024 and 2025 paired with unchanged median GDP projections for 2024 and 2025.
During the month of August most term points in the U.S. Treasury curve moved lower. Specifically, the U.S. Treasury 2-year yield fell 34 basis point to 3.92% while the 10-year fell 12 basis points to 3.91%. The results of these changes netted a less inverted curve with the 2/10 inversion compressing to 1 basis point.
Mortgage Rates moved lower in August as the Freddie Mac 30- year Primary Mortgage Market Survey fell to 6.35% as of August 29th, down 43 basis points from July 25th.
POLITICAL AND
REGULATORY TRENDS
During a rally on July 13th former President Donald Trump survived an assassination attempt. In the week following, he named J.D. Vance as his Vice President and formally accepted the nomination from the Republican Party at the 2024 Republican Convention.
President Joe Biden withdrew from the 2024 Presidential election on July 21st and endorsed his Vice President Kamala Harris to be the Democratic nominee. A month later, on August 22nd Kamal Harris formally accepted the nomination as the Democratic Candidate at the 2024 Democratic Convention.
On June 28th the Supreme Court overturned ‘Chevron v. Natural Resources Defense Council,’ after 40 years in a 6-3 decision. With the reversal, federal regulator’s ability to interpret laws and apply regulations has been curtailed and a greater emphasis on Congress for direct policy actions is implied. The ruling also gives lower courts a mandate to ensure appropriate actions taken by regulators. Chief Justice Roberts noted: “Chevron was a judicial invention that required judges to disregard their statutory duties.”
INVESTMENT
TRENDS
The August CPI report detailed year-over-year inflation at 2.9%, above target levels but below the June rate of 3.0% and below expectations. Second quarter U.S. GDP report detailed a resilient consumer and an expanding US economy with a 3.0% growth rate. Finally, the most recent Summary of Economic Projections detailed an expected 2024-year end GDP of 2.1% with inflation measures above the U.S. Central Banks target of 2.0%.
Cooling-but-persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on economic activity and investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a slower than initially expected pace.
Equal Housing Lender.