October Economic Update
- Barrington Capital Management, Inc.
- Oct 7, 2024
- 3 min read
Market Summary
The market narrative last month was dominated by the Federal Reserve’s interest rate decision which culminated in the decision to cut rates for the first time since March of 2020 during the onset of the COVID pandemic. The initial reactions to the markets were mixed but the major US indices pulled ahead in the weeks following the announcement. For the month of September, the S&P 500 added 2.02%, the Nasdaq 100 rose 2.48%, and the small cap Russell 2000 index lagged but still managed to post a 0.56% gain. (1)
Interest Rate Cut
On September 18th, the Federal Reserve announced they would cut interest rates a half of a percentage point, or 50 basis points, marking the first policy shift since they began raising rates in March 2022 to combat inflation. The rate cut itself was no surprise as it has been telegraphed by the Fed and anticipated by the markets since the beginning of this year. However, there was a surprise with the amount of the rate cut as most market participants were anticipating a quarter point reduction instead of a half point. (2,3)
To explain the larger than expected interest rate cut, Fed Chair Jerome Powell stated, “upside risks to inflation have diminished and downside risks to the labor market have risen.” He went on to further state, “the labor market has continued to cool which has been a notable step down from earlier this year.” (2)
On the inflation front, Powell stated inflation has eased notably but remains above their goal while longer-term inflation expectations appear to be “well anchored”, implying that moving forward, more attention will be placed upon the labor market versus inflation (barring the Middle East conflict increasing which happen after this Fed announcement). (2)
Regarding future interest rate decisions, there wasn’t a clear or concise answer as to whether more rate cuts will be coming. Instead, it was stated that the Fed will “adjust policy as necessary” and the Fed can “go quicker or slower, or pause, on rate cuts if it is appropriate.” In other words, future rate decisions will be based on solely on future labor market and inflation data. As for the market, traders are currently betting there is a 97.5% probability they will reduce interest rates another quarter point for the November Fed decision. (4)
Looking Forward…
Outside of the Fed decision, the other major market news in the past month occurred in the beginning of October with further destabilization in the Middle East when Iran engaged in a second round of missile attacks on Israel as well as a new offensive push by Israel to engage Hezbollah in Lebanon. This very well could have implications to the market, as well as inflation and interest rates, if the matter escalates into a larger conflict.
The main concern to the markets would be if oil production is impacted, which Israel is currently considering attacking Iran’s oil infrastructure. The higher the cost of oil, the higher the cost of shipping which could raise the cost of goods – especially imports - and spark another wave of inflation. No one can predict what will happen in the coming months with this evolving situation in that region so each development must be carefully scrutinized until de-escalation occurs. Until then, we will keep a close eye on the matter as it plays out.
Monthly Financial Tip:
Yes, you can take a tax deduction if you have a mortgage – but the tax break may be less significant than you think. For some, it may be wise to retire that debt before your own retirement.
Citations:
1. Charles Schwab, October 04, 2024
2. Federal Reserve, Sept 18, 2024
3. CME Group, Sept 18, 2024
4. CME Group, Oct 04, 2024
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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