Market Insight

October Market Insight

With inflation now reduced from well over 9% to 2.5% as reported in the August 2024 Consumer Price Index, the Fed can concentrate its efforts on reducing interest rates to better align with current inflationary trends. The recent 50-basis-point cut in the Fed Funds rate was somewhat unexpected, as most economists had predicted only a 25-basis-point cut. Chairman Powell explained in his post-meeting press conference that the Fed considered a 25-basis-point cut in July, but delayed action awaiting additional economic data. Reading between the lines, the larger September reduction may have been enacted to acknowledge that a 25-basis-point cut could have been taken sooner.

Current estimates suggest short-term rates may fall to 3% in the second half of 2025. All things being equal, this should translate into a productive bond market. Although short-term rates are likely to follow the Fed path, long-term rates may not fall as rapidly, if at all, as long-term rates have already declined in anticipation of Fed action. Prior reports showing lower inflation and modest economic growth prompted institutional investors and United Wealth Management to move money into longer-term fixed income months ago. Our investment committee extended the duration (a proxy for average maturity) in our fixed income portfolios twice over the last year, which has been profitable for our clients.

In the past, stocks have typically shown strong performance between the last rate hike and the first rate cut. However, they tend to underperform once the Fed begins to cut rates, which is almost exclusively in response to deteriorating economic conditions. Our team does not believe this to be the case right now, considering the solid state of the U.S. economy, employment, consumer activity, and spending. Although historical data indicates that presidential elections have not significantly impacted financial markets, the S&P 500 has generated positive returns in 9 out of the last 12 presidential election years between the end of the 3rd quarter through the first half of the following year, with an average gain of over 15%. With lower rates, record-setting earnings, and reasonably tamed inflation on the horizon, we maintain a positive outlook on the financial markets.