INVESTMENT NEWS SEPTEMBER '24
Speed read
- It is no longer a question of whether the Fed will cut rates on September 18th, but by how much.
- Financial markets now expect 100bp of interest rate cuts in the last 4 months of 2024 and 125bp in 2025.
- If these expectations are correct and the Fed cuts rates by 50bp on September 18th, it is time to start anticipating an impending recession.
- Gold (+21%) and Silver (+21%) are the top-performing major assets this year.
- As we look to the last four months of 2024, they will be largely determined by the US elections and the upcoming cycle of rate cuts by the Fed.
- If we look at history, we see that the run-up to elections is always a difficult and uncertain period for stocks. Once the elections are over, we usually see stock markets react positively.
- If we look at the S&P 500 during FED easing cycles, we see that the S&P 500 rises when there is no recession (’85, ’95, ’98) and/or the FED starts cutting rates early (’90, ’20). The years in which the FED started cutting rates “too late” and the recession had more or less already started (’80, ’00, ’08) were bad for stocks.
- The crucial question is, is the first rate cut of the FED on September 18th on time or is it too late. Time will tell, but for now it seems advisable to keep part of the portfolio in Gold and cash until the American elections.
Economy
After “only” 114,000 jobs were added in July and unemployment in the US had risen to 4.3%, it turned out in August that the employment figures for the previous months had to be revised downwards by another 818,000 jobs. Where the FED in July still spoke about “risks to the employment goal had increased, and the risks to the inflation goal had decreased”, FED Governor Powell said at the end of August “The time has come for policy to adjust”. So, the question is no longer whether the FED will lower the interest rate on September 18th, but by how much. However, the comment is as powerful as it is remarkable. For example, inflation at +2.9% is still (too) high and unemployment at 4.3% is historically low. In addition, after the better-than-expected economic growth in 24Q2 (+0.75%qoq), the Atlanta FED also expects higher than forecasted growth in 24Q3 (+0.5%qoq) and the financial situation of households is to remain healthy.
On the other hand, the downward revision of employment figures has not been this large since the “Great Financial Crisis” in 2009 and the ISM Manufacturing Index (47.2) has been indicating for some time that there is a continued contraction in US factory activity. Because the unrest on the financial markets is also starting to increase and more and more reliable leading indicators such as the Yield Curve, the Conference Board Leading Indicator and the Sahm Rule* are predicting a recession, the FED also sees the economic risks increasing rapidly.
Financial markets are now expecting 100bp of interest rate cuts in the last 4 months of 2024 and 125bp in 2025. If these expectations are right and the FED cuts rates by 50bp on September 18th, it will be time to start anticipating an impending recession.
Financial Markets
Given the geopolitical and economic risks in the world and the uncertain outcome of the US elections, we have been advising since the beginning of this year to hold part of a portfolio in Gold and Cash. Given the rise of the S&P 500 (+20% ytd) and the Nasdaq (+19% ytd), this seems like a costly mistake. However, Gold (+21%) and Silver (+21%) are the top-performing major assets this year.
Looking at the last four months of 2024, they will be largely determined by the US elections and the upcoming cycle of interest rate cuts by the FED. Looking at history, we see that the run-up to elections is always a difficult and uncertain period for stocks. Once the elections are over, we usually see the stock markets react positively. Looking at the S&P 500 during FED easing cycles, we see that the S&P 500 rises when there is no recession ('85, '95, '98) and/or the FED starts cutting interest rates early ('90, '20). The years in which the FED started cutting interest rates "too late" and the recession had more or less already started ('80, '00, '08) were bad for stocks.
The crucial question is therefore, is the first rate cut of the FED on September 18th on time or is it too late. Time will tell, but for now it seems advisable to keep part of the portfolio in Gold and cash until the American elections.
* The Sahm Rule signals a likely recession when the 3-month average unemployment rate rises 0.5 percentage points above its 12-month low.
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