Key Takeaways
- The Federal Reserve has initiated a rate-cutting cycle, lowering rates by 0.50%, which may stimulate sectors like automobiles, housing, and manufacturing.
- The U.S. economy is currently projected to grow at 2.9% for Q3, surpassing the Fed’s 2.0% full-year GDP forecast.
- Inflation has decreased to 2.53%, down from a 9.06% peak in June 2022, signaling a return to healthier levels.
- Market volatility may increase in October due to political showdowns and key economic data releases, despite strong year-to-date performance, with the S&P 500 up 20%.
- Lower interest rates present opportunities in capital-intensive sectors and bonds.
September Insights
Well, it’s the middle of September, and we’re starting to see signs of seasonal change. The nights are getting cooler, the days aren’t as long, and the leaves are beginning to fall. The same can be said for the Federal Reserve and the economy. Recently, the Federal Reserve announced a 0.50% rate cut, marking the beginning of what’s called a rate-cutting cycle. This is a significant change from their nearly three-year stance of tightening monetary policy through rate increases to slow the economy and control inflation.
Why is the Fed Cutting Rates Now?
Why would the Federal Reserve cut rates? Does this mean we’re heading into a recession, or are we already in one, as some pundits suggest? I don’t think so. As I’ll explain below, there’s enough evidence to suggest the economy remains quite strong. While unemployment is higher than it was a year ago, it’s more of a normalization than the beginning of a tailspin.
Economic Backdrop
The Atlanta Fed’s September 18th estimate projects 2.9% annualized growth for the U.S. economy in Q3, a strong figure compared to the Federal Reserve’s full-year GDP growth forecast of 2.0%. GDP measures overall economic output, and this solid growth suggests the economy is performing well.
As the Federal Reserve begins its rate-cutting cycle, lower borrowing costs should stimulate sectors like automobiles, major appliances, and machinery, and could help revive the struggling manufacturing industry. Additionally, lower interest rates may ease homebuying costs.
Inflation, as measured by the Consumer Price Index (CPI), rose 2.53% over the past year, a sharp decline from its June 2022 peak of 9.06%. This drop suggests inflation is normalizing, with current levels close to the ideal 2-3% range.
Labor Market
The idea of “full employment” is often associated with an unemployment rate of around 5%, meaning 95% of those wanting to work have a job. The current unemployment rate stands at 4.2%. While that’s up from 3.7% in January, the ultra-low levels we saw earlier were unsustainable. When unemployment is too low, it can actually drive inflation higher due to wage competition among employers.
I believe we’re now in a balanced position. While it may take some people a bit longer to find new jobs, that’s expected after the hiring boom of recent years. Employers are being more selective, and remote work policies might become stricter, as we’ve seen with Amazon’s recent push for more in-office work. Worker productivity should also increase, which is positive for economic growth, as new workers are beginning to get more familiar with their roles and becoming more efficient.
Market Performance and October Volatility
Investment returns have been strong this year, with the S&P 500 up around 20% and the aggregate bond index gaining 5%. Unlike last year, gains are spread more evenly across industries, with companies like Walmart, JPMorgan, and T-Mobile performing well. This indicates a healthier, more diversified market.
However, as we approach November, I expect increased volatility. Historically, October is a turbulent month for markets, and this year, political uncertainty and economic data releases could add to the swings. With the Federal Reserve holding off on any major decisions until after the elections, investors are likely to scrutinize each economic report closely, seeking clues about the economy’s future direction. As political showdowns heat up, we may see fluctuations in market sentiment, especially in the coming weeks.
Opportunities Ahead
The Federal Reserve’s rate cut signals a clear commitment to supporting the economy and labor market. Over recent years, manufacturers have struggled with higher interest rates, a strong dollar, and rising labor costs, which dampened demand. As rates normalize, I’m optimistic we’ll see renewed demand for capital-intensive goods such as vehicles, machinery, and appliances, especially as home purchases pick up.
Additionally, lower financing costs will help businesses reduce operating expenses, making industries like industrial equipment, materials, and utilities more attractive for investment. Bonds, too, present a strong opportunity, as they have the potential to recover from their 2022 losses while offering solid interest rates in this more favorable rate environment.
Closing Thoughts
I’ve covered a lot in this commentary, but these insights only scratch the surface of what’s happening in today’s dynamic market. Every client’s situation is unique, and I’d be happy to explore how these trends could impact your financial goals. If you’d like to discuss how to position your portfolio for the opportunities ahead, feel free to reach out. I’m always here to help and answer any questions you may have.
About Ricardo
Ricardo J. Ferreira is the Portfolio Manager at Paragon Wealth, a firm he co-founded with Charlie McNamara, III, and Phil Rosenau. Drawing on his passion for finance and a talent for solving complex financial challenges, Ricardo leads the firm’s investment strategies, ensuring clients receive personalized and forward-thinking solutions.
A decorated U.S. Navy Veteran, Ricardo served at N.A.E.S. Lakehurst and aboard the USS George Washington, where he worked in aviation support. After his military service, Ricardo studied economics at Liberty University and began his financial career at Prudential Financial, where he met his future partners, Charlie and Phil.
Outside of work, Ricardo enjoys spending time with his family. He is married to Tina, owner of Main Street Accounting & Tax, and they have two children. Active in his community, Ricardo participates in various local events and serves on the finance council at St. Jude Parish in Chalfont. A passionate runner, he can often be found competing in local 5k and trail races on the weekends. To learn more about Ricardo, connect with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Any securities mentioned here are for informational purposes only and are not recommendations to buy or sell any security.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Paragon Wealth Management and Great Valley Advisor Group are separate entities from LPL Financial.