As we close out the summer, investors everywhere—including our team here at LCM—have closely monitored the Federal Reserve’s annual conference in Jackson Hole, Wyoming, which wrapped two weeks ago on August 23. As you may have heard, the event marked a significant pivot for Federal Reserve Chairman Jerome Powell who signaled a potential rate cut in September. It’s a move that could have significant implications for both equity and fixed-income markets.
Key Takeaways from Jackson Hole
Powell’s remarks were clear and decisive, stating that “The time has come for policy to adjust.” Of course, he added a necessary caveat: “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability.” In other words, there will be no promises until all the data is in!
Even so, Powell’s comments came as no surprise. The numbers that are in are giving the Fed plenty of reason to, finally, start cutting rates—even if they choose to do so at a conservative rate. In response, US Treasury yields continued their downward trend, while recent data shows inflation slowing and other economic indicators softening. It’s a scenario that has investors and consumers alike crossing their fingers in hopes of a rate cut as early as mid-September when the next Federal Open Market Committee (FOMC) meeting takes place.
Navigating volatility
U.S. equities experienced a sharp sell-off in early August, with the S&P 500 declining by approximately 7.3% before rebounding towards previous all-time highs. The CBOE Volatility Index (VIX), which had remained relatively stable for ten months, saw a notable increase between mid-July and early August. This surge was driven by a mix of economic, political, and geopolitical factors. August often brings increased volatility due to reduced market liquidity as many investors take vacations, setting the stage for September, which has historically been the weakest month of the year. Since 2020, every September has recorded negative returns, so it will be of interest to see if the market can reverse this trend, particularly with the Federal Reserve’s expected rate cut in September.
Despite the challenging headlines during this period, the increase in volatility presented valuable long-term investment opportunities, enabling us to strategically increase exposure to high-quality companies with strong balance sheets and consistent earnings growth. Following Federal Reserve Chair Jerome Powell’s comments at the Jackson Hole Symposium, market sentiment improved significantly, leading to a rapid decline in the VIX from its early August peak of over 38 to 15.
The ongoing reduction in market volatility may indicate a favorable outlook, supported by stronger-than-anticipated corporate earnings for the second quarter. Approximately 95% of S&P 500 companies have reported their Q2 2024 earnings, with results exceeding expectations. Year-over-year sales growth is at 5.4%, and earnings growth has reached 12.7%. Although Q3 2024 earnings estimates have been revised downward—from an anticipated 7.5% growth in July to a current projection of 4.2%—the outlook for 2025 remains positive, with estimates rising to 15.1%. For context, the earnings growth estimate for 2024 remains solid at 10%.
Signs of stabilization
Fixed Income had positive total returns across the board with treasuries, investment-grade & high-yield corporates, mortgage-backed securities (MBS), taxable municipals, preferred stocks, senior loans, and emerging markets all gaining over the past two weeks, ending August 23. Combined with better-than-expected corporate earnings & economic data, does this mean the Fed could finally be successful in engineering the ‘soft landing’ they have been hoping for?
Encouraging news on the inflation front seems to support such a hypothesis, along with pockets of strength in recently released economic data. The following numbers are all coming together to paint a rather pretty picture that (hopefully) will continue until the Fed acts in September:
July data demonstrated new economic growth: The Bureau of Economic Analysis (BEA) released its second reading of 2Q24 real gross domestic product, indicating a robust +3.0% annualized growth rate, surpassing the previous estimate of +2.8%. This follows an upward revision to the final estimate for 1Q24 GDP, which increased +1.4%.
Inflation is continuing on a downward trajectory: The Commerce Department reported Friday that the Personal Consumption Expenditures (PCE) Price Index, increased by +0.2% (month/month) in July, with an annual increase of +2.5%. Core PCE, the Fed’s preferred inflation gauge, which excludes food and energy prices, rose by +2.6% year-over-year, slightly below the +2.7% forecast.
Consumer spending is getting stronger: Inflation-adjusted consumer spending increased by +0.4% in July, signaling stronger activity compared to the previous month. As a result, personal income rose by +0.3% in July, slightly above market expectations of +0.2%.
Rising consumer confidence is driving retail growth: US Consumer Confidence hit a six-month high in August, climbing to 103.3 from the July reading of 101.9. Despite lingering concerns regarding the labor market, optimism surrounding inflation and the broader economy is accelerating. This growing confidence has translated into stronger retail activity, with July retail sales exceeding expectations, growing +1.0% (month/month), above the +0.3% consensus.
Small business sentiment is improving: The NFIB Small Business Survey also painted an encouraging picture, with the index improving to 93.7. Pricing pressures have eased, giving small businesses greater optimism for the future. This shift may have contributed to the improved employment numbers as well: the latest initial jobless claims ticked lower to 231,000 for the week ending August 30.
The ‘soft landing’ narrative is gaining traction: The newest economic data was in-line or better than expectations, spurring renewed talks of a ‘soft landing’ and the Goldilocks economy narrative.
All that said, other economic data suggests some emerging cracks in US growth. Housing starts fell by -6.8% month/month to a seasonally adjusted annual rate of 1.24 million in July, industrial production declined by -0.6% m/m, and the Philadelphia Fed survey dropped to -7.0 in August.
We will closely monitor Q3 & Q4 earnings to answer the apparent disparity between the projected double-digit earnings growth for 2025 and the anticipated 225 basis points of rate cuts over the next 16 months. Additionally, we will keep an eye on fluctuations in U.S. Treasury rates, following the sharp decline in 10-year yields from a mid-August peak of 4.7% to 3.8% as the market anticipates future rate cuts.
Preparing for the Fed’s Next Move
As always, only time will tell how each of these factors plays out in the second half of the year. Now, all eyes are on the Fed’s meeting on September 17-19. With a rate cut looking increasingly likely—and potentially kicking off a series of future rate reductions—we are buckling our seatbelts for what we expect will be an exciting few months ahead!
Whatever comes our way, know that we are focused on the details and continuously seeking opportunities across the market to help grow and protect your assets. As always, if you have any questions at all, please reach out. We are here to help!
