Fall 2024 Market Perspectives with Brett Carleton

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Greetings, 

The big economic news this quarter must be the Federal Reserves (The Fed) announcement on September 18th that they were reducing the Federal funds rate by a half percent. Jerome Powell, the Chair of the Fed, announced they anticipate another half percentage point drop later this year, followed by an additional one percentage point reduction next year. This marks the end of a period in which interest rates were raised 11 times since March 2022 to try and stave off inflation that peaked at 9.1%. Markets had been anticipating this end to the “tight” monetary policy, and all major asset classes rallied from a sell-off in August. We have also seen interest rates in the marketplace drop quite significantly in anticipation of the Fed’s move. 

Why is the Fed doing this now, and what should we expect with these interest rate changes? First, there are signs that the U.S. economy is beginning to slow, and by lowering interest rates, the Fed hopes to encourage borrowing by both businesses and consumers. Employment growth and consumer spending have both slowed this year, so lower interest rates have historically led to more consumer spending along with business investment. Secondly, inflation has dropped to a level the Fed is comfortable with, and believes prices will remain stable from here. Most of the disruptions to global trade caused by Covid appear to have normalized. This was one of the early causes of the inflation we experienced, followed by governments around the world handing out money to their citizenry.  

With the Fed’s shift to easing interest rates, we now wait to see if they can pull off a “soft landing” and avoid a recession. On the positive side, corporate earnings continued to be strong, employment recovered from the Covid era layoffs, and consumer spending remained robust. Having said that, it is a Presidential election year, the U.S. stock market is at all-time highs, and there are wars in both the Middle East and Eastern Europe - all events that have historically contributed to volatility in both equity markets and the economy.  

So, what should a long-term investor do in times like these? It is critical that we stay committed to our plan, as it is impossible to predict how consumers will react with their spending, or how corporations will grow their earnings.  An example of this is Nvidia, a 30-year-old computer graphics chip manufacturer that suddenly has the most powerful chips used in the Artificial Intelligence space. Their revenue has grown from $26 Billion in FY 2023 to an estimated $130 Billion in FY 2025. To participate in growth like this, we must be invested.   

One positive trend this quarter is the breadth of the current rally. It has expanded to encompass asset classes that have not participated in a material way in this “Tech” led rally of the past two years. This allows us to rebalance portfolios, reducing risk while maintaining return potential. Bonds have become a more desirable asset class as their yields have come up significantly during this Fed tightening cycle, and we can now expect bond fund prices to increase over time as interest rates are projected to go down over the next 15-18 months. While there are many factors that can impact equity markets, the truth is, there is always something going on. This reminds me of the adage, “the stock market climbs a wall of worries.” 

Please share any comments you may have.

Brett Carleton, CFP®, ChFC®