The Fed Recalibrates, Equity Markets Celebrate

Performance for Week Ending 9/20/2024:

The Dow Jones Industrial Average (Dow) gained 1.62%, the Standard & Poor’s 500 Index (S&P 500) added 1.36% and the Nasdaq Composite Index (NASDAQ) finished up 1.49%. Sector breadth was positive with 8 of the 11 S&P sector groups closing higher. The Energy sector (+3.79%) paced the gains followed by Communication Services (+3.70%) and Financials (+2.34%).

*See below for Index Definitions

MARKET OBSERVATIONS: 9/16/2024  – 9/20/2024

The S&P 500 finished higher for a second straight week following a larger than expected rate cut by the Federal Reserve. The reduction in rates coupled with data showing the economy remains on firm footing increased confidence the Fed will be able to maneuver a soft landing for the US economy and avoid slipping into recession.

FOMC Recap: At the conclusion of the Federal Open Market Committee (FOMC) meeting the Fed announced a reduction in their key lending rate of a half percentage point to a range of 4.75% to 5.00%. While a rate cut was widely expected most economists were only expecting a reduction of a quarter percent. As is typical at quarter end FOMC meetings, the Fed released an updated Summary of Economic Projections (SEP) report which lays out where committee members anticipate interest rates, economic growth, unemployment, and inflation are headed over the next couple years. According the so-called “dot plot” within the report, the committee anticipates cutting rates by another 150 basis points (1.5 percentage points) by the end of next year. The start of a rate cutting cycle during non-recessionary periods has shown to be favorable for the equity markets over the intermediate term. Ultimately, the Fed’s efforts should result in lower mortgage rates, lower fees on credit cards, and overall lower lending rates. In turn, this should help jumpstart the housing market and ultimately fuel an uptick in consumption – which is the key driver of economic growth in the U.S.

Powell Presser: During the after-meeting press conference Chairman Powell said the Fed’s action was an effort to “recalibrate” policy down over time to a more neutral level. Powell appeared to caution against the size of the reduction, suggesting the market should not assume that “this is the new pace” for reductions going forward. The Fed Chair added that the 50-basis point reduction was a sign of the Committee’s commitment “not to get behind the curve” in normalizing rates. Powell also indicated that had policymakers known the weakness in the July jobs report when they met, they might have cut rates at the time. The Chair ended the press conference on a positive note, making it clear that he doesn’t think a downturn is imminent and, by extension, doesn’t see a recession on the horizon either.

Economic Roundup: US retail sales in August, unadjusted for inflation, increased 0.1% after a revised 1.1% gain in July. Excluding autos and gasoline stations, sales advanced for a fourth straight month. The retail sales report showed so-called control-group sales — which are used to calculate GDP — rose 0.3% in August. The measure excludes food services, auto dealers, building materials stores and gasoline stations. Control-group sales rose at a robust 5.7% annualized pace in latest three months, the fastest rate since August 2023. On the housing front, existing home sales fell by 2.5% month-over-month to 3.86 million units during the month of August. The reading was below the consensus forecast, which called for a sequential decrease of 0.3% to 3.90 million units. On a year-over-year basis, existing home sales were down by 4.2%, continuing a run of 37 straight months of year-over-year declines as the resale market continues to be impacted by near-record prices and high (though now easing) borrowing costs. On the latter point, mortgage rates declined last week to the lowest level since September 2022, stoking an influx of applications for home purchases and refinancing. According to the Mortgage Bankers Association, the contract rate on a 30-year fixed mortgage dropped 14 basis points to 6.15% in the week ended Sept. 13. The rate has fallen seven straight weeks, the longest such stretch since 2018-2019. In labor news, applications for US unemployment benefits fell to the lowest level since May, indicating the job market remains healthy despite a slowdown in hiring. Initial claims decreased by 12K to 219K in the week ended Sept. 14. The four-week moving average, a metric that helps smooth out week-to-week volatility, fell to 227.5K, the lowest since June.

The Week Ahead: The focal point of this week’s data calendar will come on Friday when the Fed's preferred inflation gauge, the core PCE, will be reported. Other economic reports of interest included the S&P Global manufacturing and services PMIs, the Conference Board’s report on consumer confidence, new home sales, and durable goods orders. It will be another quiet week on the earnings front with just 6 members of the S&P 500 scheduled to report fiscal quarter results. With Fed officials now out of the pre-FOMC blackout period, the Fed speaking calendar will pick up this week with 9 appearances on the calendar including remarks from Fed Chair Powell on Thursday. Central bank decisions from Australia, Sweden and Switzerland will also be watched closely.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.