MARKET WATCH  

At the Federal Open Market Committee (FOMC) meeting in September, the Federal Reserve changed its policy stance and lowered interest rates by 50 basis points, easing monetary policy for the first time in four years.  Chairman Powell referred to progress on the battle with inflation, as well as some recent slackening in the employment picture as reasons for this change in policy. While a cut in interest rates was largely expected by the markets, the size of the cut at 50 basis points, as opposed to 25 basis points, was surprising. This lowered the federal funds interest rate target to a range of 4.75 percent to 5 percent.

Another surprise in September was the performance of the stock market, since it is usually one of the worst months for equities.  The S&P 500* added 2 percent, notching its first positive September since 2019 and adding to a solid year, thus far.  Of course, we still have the month of October and its reputation for market calamities to deal with going forward.  With a major surge in hostilities in the Middle East raging and a consequential Presidential election looming, the markets could be in for some heightened volatility through the end of the year.

With that said, at this juncture reviewing the market’s performance for the first three quarters of the year is an opportunity to enjoy some positivity.  I’ll start with the S&P 500*, since we already mentioned its September performance gain of two percent.  The index started the year at 4,769.83 and closed out the third quarter at a record of 5,762.48 and a 20.81 percent advance year to date (YTD).  The Dow Jones Industrial Average (DJIA)* began the year at 37,689.54, crossed the 40,000 threshold and finished the quarter with a record close of 42,330.15 which was an increase of 12.31 percent YTD. 

While there was some consolidation in the markets and the NASDAQ* slipped into correction territory briefly in early August, it still managed to be the best performing index for the first three quarters of the year.  It started the year at 15,011.35 and climbed to 18,189.17 which was a gain of 21.17 percent.  The Russell 2000* index of smaller companies began the year at 2,027.89 and ended the quarter at 2,229.97 an advance of 9.97 percent YTD.  Small cap companies tend to do better when the Federal Reserve reduces interest rates because they are interest rate sensitive due to their need to borrow capital.

Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2024, according to the "third" estimate released by the U.S. Bureau of Economic Analysis in late September.  While inflation has not been eliminated as a concern, the inflation reports have been tame and headed downward. The Consumer Price Index (CPI) increased 0.2 percent in August. Over the last 12 months, the all-items index increased 2.5 percent, while the all-items less food and energy index rose 3.2 percent. The Producer Price Index increased 0.2 percent for the month of August and advanced 1.7 percent for the 12 months ended in August. The Personal Consumption Expenditures (PCE) price index increased 0.1 percent in August. From the same month one year ago, the PCE price index for August increased 2.2 percent, while excluding food and energy, the PCE price index increased 2.7 percent from one year ago. 

Although inflation has not quite returned to the 2 percent target the Federal Reserve would like to see, recent employment reports have exhibited weakness in job creation, and this is the main reason they reduced interest rates by 50 basis points. The most recent employment report released by the Bureau of Labor and Statistics on October 4, 2024 reported the economy produced 254,000 non-farm jobs in September.  The report showed employment is still strong and the unemployment rate now stands at 4.1 percent.  While the average consumer is still having difficulty adjusting to the cumulative effect of the highest inflation since the 1980’s, the economy is not rolling over.  The markets have still not weathered a 10 percent correction, but they will at some point, and it’s a healthy bull market signal.

Be sure to exercise your right to vote in the November election!

GROSS DOMESTIC PRODUCT AND THE NATIONAL DEBT ISSUE

Gross Domestic Product (GDP) is the total value of goods produced and services provided in an economy.  The most recent US GDP was $29.02 trillion in the second quarter of 2024. As of September 30, 2024, the total US debt was $35.46 trillion. This is the total amount of outstanding borrowing by the US federal government, including debt held by the public and debt held by federal trust funds, such as Social Security and other government accounts.

Comparing a country’s debt to its gross domestic product reveals the country’s ability to pay down its debt. This ratio is considered a better indicator of a country’s fiscal situation than just the national debt number because it shows the burden of debt relative to the country’s total economic output and therefore its ability to repay it. The U.S. debt to GDP ratio surpassed 100% in 2013 when both debt and GDP were approximately 16.7 trillion.  Currently, the US debt to GDP ratio is 122 percent, which is not an unheard amount, but it is usually associated with the costs incurred during a wartime, not a peacetime economy.

All of us know as consumers that we can’t spend more money than we make for too long, or eventually our credit will suffer.  This can happen to countries as well, think of Greece and Italy in the not too distant past and of course Venezuela these days. 

While the US is not in imminent danger of default, the Executive and Legislative branches of our government have been making the Federal Reserve’s battle against inflation much tougher with their deficit spending.  Many of this election year’s spending proposals should never see the light of day.

EXPANSIONS, CONTRACTIONS, RECESSIONS AND YEARS ENDING IN FOUR

Investors have spent more than two years, since the Federal Reserve began raising interest rates, wondering when and if the much-discussed recession would come to pass.  While there were two consecutive quarters of negative growth in early 2022, which is the textbook definition of a recession, the National Bureau of Economic Research (NBER) did not define that period as a recession due to a modest decline in GDP. The NBER is the official arbiter of recessions and defines a recession differently.  Their definition states a recession is a significant decline in economic activity spread across the economy for more than a few months.

Since the average economic expansion is about five years and this current one began after the initial pandemic contraction in 2020, it makes sense to try to ascertain where we are currently in the cycle.  While the average expansion for the US economy has been about five years, it is important to note that no two expansions are the same.  Also, there are other factors impacting this expansion, such as the quirk of the two negative quarters in 2022 not being called a recession, and the very real possibility the Fed has been able to engineer a soft landing.  Another point to keep in mind is expansions, except for the decade from 2000 to 2010 and early 2020, have been longer in duration.  For example, after the soft landing in 1991 the economy remained in expansion until early 2001 and the expansion from 2009 until the pandemic lasted 126 months.  In the early 1980’s due to the extreme inflation during the 1970’s, there were two recessions followed by an expansion that lasted from November 1982 through 1990.  Keeping in mind Mark Twain’s quote, “History never repeats itself, but it does often rhyme”, could provide some clues as to what comes next.

Research by SentimenTrader Senior Research Analyst Jay Kaeppel may give an indication of where we are in the business cycle, as well as the current bull market.  As Ben Levinson wrote in his Barrons article regarding Kaeppel’s research, “Looking back to 1920, he found that the S&P 500 has returned an average of 35.8 percent starting on October 1 of a year ending in four.  That includes the 1920’s, the 1930’s and even the 1970’s, when the S&P 500 gained 61.7 percent from September 30, 1974, through March 31, 1976.  The worst mid-decade periods occurred in the 2010’s when the S&P 500 gained just 4.45 percent and 1960’s when it rose 6 percent. This information strongly suggests continuing to give the bullish case the benefit of the doubt, although nothing is guaranteed in the markets.”

Of course, Kaeppel’s caveat about past performance is the reason we must consider the risks to the expansion and the bull market we’ve been experiencing.  With Israel’s recent successes in their existential battle against Iran’s proxies, Hamas and Hezbollah, and Iran’s second attack on Israel, there exists the real possibility of a punishing response against Iran.  The war in Ukraine continues to drag on draining weaponry and Western coffers.  Xi Jinping’s woeful autocratic management of the Chinese economy has caused damage, but they are allied with Russia and buy their oil.  Xi also wants Taiwan.  When our Presidential election is settled, let’s hope Congress can figure a way to stem the red ink, as deficit spending must be curtailed. 

Company Information

Jersey Benefits Advisors is the trade name used by John H. Kaighn to offer various products and services.

PO Box 1406

Ocean City, NJ 08270

Phone: (609) 827-0194

Fax: (866) 637-2479

Email: kaighn@jerseybenefits.com

http://jerseybenefits.com

John H. Kaighn is an Investment Advisor Representative & Registered Representative of Osaic Wealth, Inc.  Securities and Advisory Services are offered through Osaic Wealth, Inc.  Member FINRA & SIPC. Osaic Wealth, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth, Inc.

10 Exchange Place

Suite 1410

Jersey City, NJ 07302

Osaic Wealth, Inc. is not affiliated with Jersey Benefits Advisors or Jersey Benefits Group, Inc.

Jersey Benefits Group, Inc., is a licensed Insurance Agency in the State of New Jersey & offers Insurance and Third Party Administration Services

PO Box 1406

Ocean City, NJ 08226

Phone: (609) 827-0194

Fax: (866) 637-2479

Email: kaighn@jerseybenefits.com

http://jerseybenefits.com

All opinions expressed in this newsletter are independent of Osaic Wealth, Inc. and are solely those of John H. Kaighn and Jersey Benefits Advisors.

*The S&P 500, the DJIA, the NASDAQ and others referenced are unmanaged indices that are widely used as indicators of Market Trends. Past Performance does not guarantee future results and the performance of these indices does not reflect the fees and charges associated with investing.  It is not possible to invest directly in an index.

*Dollar Cost Averaging through a systematic savings plan is an excellent way to build an account without a sizeable initial investment.  Saving a portion of our pay each month is very important.  Company sponsored pension plans are one method to save and should be used for retirement.  Other systematic investment accounts, such as ROTH IRA’s, Traditional IRA’s, Coverdell Accounts, 529 Plans, Brokerage Accounts and Annuities can also be opened, and debited directly from checking or savings accounts.  For more information, just call to set up an appointment.  Referrals are always welcome. 

John H. Kaighn