September Surprised with a Strong Ending
The long-awaited rate cut from the Federal Reserve was announced on September 18th following the regularly scheduled FOMC meeting. It was the first rate reduction in over four years. The size of the cut came as a surprise. The Committee voted for one-half of a percent or 50 basis point cut. The NY Times called it an “unusually large decrease.” CNBC referred to it as an “aggressive start to its first easing campaign in four years.” Reuters said it is an “oversized rate cut” and suggested that the Fed is exhibiting confidence about inflation. CNN reported that it was a “jumbo-sized interest rate cut.”
Most expected the usual quarter-point cut and voting for a 0.50% cut was unexpected. Reactions were mixed in terms of the message it sent. Could it mean that the Fed is pleased with how inflation has cooled down, or does it mean that the economy is on the verge of a recession? Both views are being tossed around and the message from the Fed is not clear.
More importantly, what did the markets think about the news? In the immediate hours following the announcement, the stock market pulled back and closed down for the day. After investors digested the information, the indexes rose to new highs the very next day. Stocks do prefer lower interest rates and investors chose to receive this large cut in a positive light. The question on investors’ minds is will the Fed’s long term plan be sustainable. Of course, the Fed always leaves a way out, but the plan the chairman announced is for two more cuts of 0.25% each in November and December followed by perhaps four similar cuts in 2025. The goal is to get the short-term rate to the 3.0% range over the next year.
It is worth noting that the bond market had a different response. The yield on the 10 Year Treasury rose in the last two weeks of September causing bond prices to fall. Bond traders do not appear to be convinced that inflation is under control. Perhaps the Fed moved aggressively to protect the job market while inflation may be more persistent than they hope. Whatever the motivation of the Fed in this aggressive rate cut, the bond market is signaling that it is premature to believe that inflation is behind us.
September has the reputation of being the worst stock market month of the year, however, the market held up better than usual this year. Major indexes notched new all-time highs. But, we are not out of the woods yet. October is also a historically challenging month for stocks. The market looks strong as we head into October, but already this month we have experienced two devastating hurricanes, the CPI numbers came in slightly higher than expected and jobless claims are up. As we move closer to the election the market is likely to be volatile. We are watching it all unfold daily and if you have questions or concerns, give us a call.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.