Economy
The Bureau of Labor Statistics released the August CPI inflation report on Wednesday, which was in-line with Wall Street's expectations. Inflation rose by 0.2% last month, bringing the trailing one year rate of inflation to 2.5%. This is a decline from the previous reading of 2.9%. This report was an important data point ahead of next week's Fed meeting where the first of several rate cuts is expected to occur. The question on our minds is not whether or not the Fed will cut rates, but by how much they will cut. Currently, the odds of a 0.25% vs a 0.5% cut are greater, according to the CME FedWatch website. Perhaps a more important question is whether or not the Fed can bring rates down to a more normalized level on it's own timeframe before something in the economy cracks. That something may be the labor market. For now, it seems to be in decent shape. We aren't seeing weekly jobless claims climb higher, and the unemployment rate is right around 4%. We may not be adding as many jobs every month as we were a year ago, but the economy is still net positive in job creation.
Jerome Powell, you are cleared to begin your descent.
Markets
We came across a fantastic chart put together by Ritholtz Wealth Management. They looked at the market's returns for the 12 months following all past rate cutting cycles by the Fed since the 1950's. This isn't to make predictions but to provide some historical context. It's important to note that each cycle is unique, and today is no exception. There's never a perfect analog, and it's not like we have thousands of data points. With that throat clearing out of the way...
Maybe the most important factor in how the markets will do over the next 12 months is the health of the overall economy (great insight, Jason). You can see on the chart that the average market return was about 11% when the economy didn't go into a recession. However, even when the economy did experience a recession, the market returns will still positive, although lower, on average 8%. This is an important distinction - why is the Fed cutting rates? Did they begin cutting rates because the economy was weak and on the verge of recession? Or were they able to cut rates with a healthy economy as a backdrop? I'd argue that today, the economy seems to be in good shape. A recession is not currently imminent, although that could change. Although we went through a period of high inflation and prices aren't going back to pre-pandemic levels, the rate of inflation has come down significantly. The labor market is doing just good enough and the consumer seems to be in decent shape.
For the week, the S&P 500 finished higher by 4%.
What We're Reading
- Your 529 Can Now Fund a Roth IRA - WSJ
- Our Balancing Act - Humble Dollar
Have a great weekend.
Dogwood Wealth Management