The major averages ended the week essentially unchanged, despite several significant events. (Fill in the blank) won Tuesday’s Vice-Presidential debate. Friday’s employment report exceeded expectations, effectively eliminating the possibility of another ½% rate cut next month. Therefore, we might just achieve that soft landing.
Despite all the recession talk and pessimism this year, the S&P 500 has, above all surged, being up 271 days so far and winning 34 of 48 weeks, tying the record set in 2004. This pushed the index to its largest year-to-date advance last Friday this century. Bonds also performed well after that, with the Bloomberg Global Aggregate on track for its fourth-best quarter of the 21st century.
What a difference a year makes! A year ago, the markets were in turmoil, with recession fears growing rapidly in the US. The Chinese economy was struggling, and the Yen carry trade looked set to unwind again. Above all fear was prevalent. Now, as 2024 comes to a close, there is much to be optimistic about. A soft landing looks increasingly likely after all, with easing inflation, Fed rate cuts, good economic data, decent earnings, and a fresh round of stimulus in China, the world’s second-largest economy.
Thanks to Bloomberg and Deutsche Bank for the chart.
The futures markets are pricing in an additional 1.7% in rate cuts through the summer of 2025, bringing the total rate cuts for this cycle to 2.2%. This seems overly optimistic to me, though the Fed will certainly cut rates further. This type of monetary response is usually reserved for recessions, which experts say have only a 30% chance of occurring in the next 12 months. Many experts have been predicting a recession or worse for quite some time now.
With solid corporate earnings, decent economic growth, and a continued decline in inflation, it is hard to envision a recession without a major external shock. The most likely shocks would be domestic political issues or geopolitical events involving the Middle East or Ukraine. Both are highly unlikely but potentially very significant. The latest PCE inflation data shows nearly 2%, which is the Fed’s favorite measure.
Thanks to Bloomberg and the Federal Reserve for the chart.
Residential real estate data is moving dramatically in the wrong direction, struggling with high interest rates and high prices. Active inventory for new homes jumped 33.2% from a year ago, marking the 46th consecutive week of 30+% inventory gains. While new home sales are more economically significant, the existing homes market accounts for about 80% of sales. So far, the inventory of existing homes for sale hasn’t reached concerning levels. Hopefully, lower interest rates will entice buyers to return in force by the spring of 2025, providing a soft landing for real estate as well.
Thanks to Calculated Risk and realtor.com for the chart.
That’s all for this week folks, I’ll see you again next Friday.
Best, Caleb
Last Week’s Post: Up and to the right!
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