Week of November 18th, 2024

Key Points for the Week

• Stocks rallied on the election results and then pulled back as investors focused on the escalating war in Ukraine and the likelihood of smaller and fewer interest rate cuts by the Fed.
• Inflation continued to normalize last week, especially if you use more real-time measures of shelter inflation.
• With inflation apparently under control, the Fed must decide if they should continue to cut interest rates.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

Last week, the strength of the United States economy slowed investors’ roll. Federal Reserve (Fed) Chair Jerome Powell told business leaders in Dallas, Texas, that the performance of the United States economy has been “remarkably good,” better than any major economy in the world, which gives the Fed “the ability to approach our decisions carefully.”

Powell’s comments caused investors to reassess the likely pace of rate cuts. As they did, the probability of a December rate cut fell sharply, according to the CME FedWatch Tool.

The likelihood that the Fed may lower rates more slowly than expected roiled markets.

“With the world’s most important central banker in no hurry to ease monetary policy thanks to a still-robust labor market and strong economic data, bond yields once again rose and dragged stocks lower in their wake. Down 2 (percent) over five sessions, the S&P 500 erased half of its trough-to-peak gains since the election. Combined with losses in corporate credit and commodities, the week rounded out a pan-asset retreat that by one measure was the worst in 13 months.”

↳Lu Wang, Isabelle Lee, and Emily Graffeo, Bloomberg

Investors’ changing outlook was shaped by other factors, too. These included:

• Elevated stock valuations.

  “The U.S. stock market is trading at an 11 [percent] premium to its fair value estimate.”

  ↳Bella Albrecht, Morningstar

  The data reflected share prices on November 13, which was midway through last week.

• The risk of inflation rising again. Many economists believe the incoming administration’s spending and tax policies have the potential to reignite inflation, which could lead the Fed to reassess monetary policy.
• A disrupting cabinet nomination. Robert F. Kennedy Jr. to lead the Department of Health and Human Services rattled healthcare and consumer staples sectors of the market.

“Shares of biotechnology and pharmaceutical companies fell, with the S&P 500 Pharmaceuticals index down about 2 [percent]. Shares of packaged food and beverage giants…also declined.”

↳Samuel Indyk and Ludwig Burger, Reuters

By the end of the week, major U.S. stock indices were down. U.S. bond markets continued to be wary of tariffs and inflation, lifting the yield on the benchmark 10-year U.S. Treasury to 4.5 percent. By week’s end, though, the 10-year Treasury yield had settled at 4.3 percent, reported Liz Capo McCormick of Bloomberg.

This Week in the Markets

After the S&P 500 soared the week of the election (the best week of the year), there was some late week selling last week on worries over inflation potentially coming back, the Federal Reserve Bank (Fed) possibly not cutting as much as expected, and technology stocks lagging. Although any of those reasons could have contributed to the weakness we saw, the S&P 500 is still having a strong year, so some type of periodic weakness or consolidation is perfectly normal.

Another Look at the Election and Stocks

The economy is strong, earnings are expanding, inflation is under control, and the Fed continues to cut interest rates, then stocks can do well regardless of who is in the White House.

Looking back at the past six Presidents, the annualized return was double digits five times, with 15.2% under President Clinton the strongest. In addition, the S&P 500 was up 10.2% annualized under eight years of President Reagan, up 10.9% under President George H.W. Bush, up 15.2% under President Clinton, up 13.8% under President Obama, and up 14.1% during President Trump’s first term. Of course, stocks did fall an annualized 6.2% under President George W. Bush, but he had the misfortune of overseeing our country under not one but two recessions and the stock market crashes that went them (the tech bubble bursting and the Great Financial Crisis).

Inflation

The October Consumer Price Index (CPI) data held no surprises for markets, either to the downside or the upside. Since inflation had already normalized, that means the latest data confirms the pre-existing trend. Headline CPI rose 0.2% in October and is up 2.6% year over year. Core CPI (excluding food and energy), which is typically used as a gauge for underlying inflationary pressure by the Fed, rose 0.3% last month and is up 3.3% since last year.

It may seem odd to say inflation has normalized when these numbers are clearly above the Fed’s target of 2%. The thing is, almost all the “excess” inflation is coming from shelter prices. If you take out shelter inflation, which makes up about 35% of the CPI basket, headline CPI is up just 1.3% year over year. Even over the last three months, CPI ex shelter is running at an annualized pace of 1.3% versus 2.5% for overall CPI.

It is true that housing does take a big portion of a household’s budget, except the heat in shelter inflation comes from rent increases we saw in 2021, when rents surged. Official shelter data has significant lags to what we see in the private market real-time data. Private data (via Apartment List) indicates that rental inflation has slowed significantly, and new rental lease prices have been falling for over a year now. WisdomTree recently did an analysis on CPI, but with more real-time housing price data. Based on their analysis:

• Headline CPI with real-time shelter inflation is up 1.3% year over year versus 2.6% for CPI with official shelter data.
• Core CPI with real-time shelter inflation is up 1.8% year over year versus 3.3% for core CPI with official shelter data.

Jeremy Schwartz, the Global Chief Investment Officer at WisdomTree, put it succinctly: “The Fed should continue recalibrating to neutral.”

The good news is that the Powell-led Fed seems inclined to do so as well. There has been a question about whether the Fed should be cutting when economic growth and the stock market are running strong. The Fed does not have a GDP mandate, nor do they have a stock market mandate. In fact, the Fed has historically cut rates several times with stocks near all-time highs (and stocks were higher 20 out of 20 such times a year later, with an average return of 14%). The Fed does have a stable inflation mandate and a maximum employment mandate. It is clear the former goal has been met, but there is some risk to the latter, which the Fed seems thankfully aware of. After the most recent Fed meeting in November, Powell said that the labor market has cooled a great deal from its overheated state of two years ago and is now essentially in balance. It is continuing to cool, albeit at a modest rate, and we do not need further cooling, we do not think, to achieve our inflation mandate.

In short, the Fed does not want the labor market to get weaker. Their most recent unemployment rate projections (from the September meeting) confirm this – they projected the 2024 and 2025 unemployment rate to remain steady at 4.4% (it is currently at 4.1%). As we wrote back then, the Fed is essentially putting a cap (to the degree it is in their control) on the unemployment rate, or rather, a floor under the economy. Crucially, the fact that inflation has normalized is what allows them to do this. There is good reason to think this dynamic may play out in 2025 as well, with shelter disinflation in the pipeline and continuing to put downward pressure on overall inflation.

To Powell’s point, the labor market does not need to cool further for them to achieve their inflation mandate. A good place to see this is with wage growth. The latest Employment Cost Index data for private sector service industry workers showed wages growing 3.6% since last year but slowing to a 2.7% annualized pace in Q3. This metric is historically correlated with services inflation, and it looks like there may be further moderation ahead.

Thanksgiving Abundance

Turkey, mashed potatoes, and cranberry sauce have been on the Thanksgiving table for a long time. In many homes, though, the holiday meal has evolved to include regional dishes, cultural treats, and family favorites. People who responded to a social media post asking about unique Thanksgiving dishes reported that their meals include:

• Sliced tomatoes, cucumbers, olives, and onions with oil and vinegar,
• Chorizo cornbread with jalapeños,
• Sashimi and grilled salmon collar,
• Cranberries, grapes, walnuts, and whipped cream salad,
• Quinoa with roasted delicata squash, kale, and pistachios,
• Creamed pearl onions,
• Spinach casserole,
• Twice baked potatoes,
• Shrimp and mirlitons (pear-shaped squash), and many other dishes.

Another reason Thanksgiving meals have evolved is dietary preferences. Some families include one or more vegetarian or vegan members, and others are eating less meat for health reasons.

Of course, grocery stores have played a significant role in the evolution of Thanksgiving dinner.

“The average grocery store today has 300,000+ [items in stock], nearly eight times more than the average store of the 1970s.”

↳Andy Nelson, Supermarket Perimeter

Having access to a wider variety of ingredients makes it possible to prepare holiday feasts that make your taste buds happy.

What is your family’s favorite Thanksgiving dish?

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

How To Avoid Tax Scams

Below is a link to a video provided by the IRS to help avoid tax scams:

https://www.youtube.com/@irsvideos

If you have any questions, please contact us.

The Social Security Lock

The Social Security Lock (also known as the "Social Security Number (SSN) Lock") is a feature provided by the Social Security Administration (SSA) that allows individuals to block electronic and automated access to their Social Security records. This is primarily a security measure to prevent unauthorized or fraudulent use of your Social Security Number (SSN), particularly to help prevent identity theft.

How the Social Security Lock Works:

• Blocking Access: When you activate the lock on your SSN, it prevents others (and yourself) from accessing your Social Security records through electronic means, such as through automated phone systems or online services.
• Protecting Your Information: This feature is especially helpful if you are concerned about identity theft or if your SSN has been compromised. It reduces the likelihood that someone can fraudulently open accounts, apply for credit, or access benefits using your SSN.
• Unlocking for Legitimate Use: If you need to use your SSN for legitimate reasons, such as applying for benefits, you can temporarily unlock or remove the SSN Lock by contacting the SSA. You can also re-lock it after your transaction is completed. __ How to Enable or Disable the Social Security Lock:__
• Visit the SSA Website: Go to the Social Security Administration’s website and sign into your mySocialSecurity account (you will need to create an account if you do not have one).
• Enable SSN Lock: Look for the option to lock your SSN and follow the prompts to activate the lock.
• Disable SSN Lock: If you need to unlock your SSN for any reason, you can do so temporarily by following the same process.

Important Notes:

• The SSN Lock applies to automated access to your records. It does not stop manual processing of benefits or in-person requests for information.
• The lock is a good idea if you are not currently using your SSN often, but you should keep in mind that it requires proactive management, especially if you need to access benefits or financial services in the future.

This tool provides an extra layer of protection but does not replace the need for vigilance regarding the use of your Social Security Number in other situations, like sharing it with third parties or financial institutions.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

November 18, 1883: Railroads Create the First Time Zones

At exactly noon on November 18 th , 1883, American and Canadian railroads began using four continental time zones to end the confusion of dealing with thousands of local times. The bold move was emblematic of the power shared by the railroad companies.

The need for continental time zones stemmed directly from the problems of moving passengers and freight over the thousands of miles of rail line that covered North America by the 1880s. Since human beings had first begun keeping track of time, they set their clocks to the local movement of the sun. Even as late as the 1880s, most towns in the U.S. had their own local time, generally based on “high noon,” or the time when the sun was at its highest point in the sky. As railroads began to shrink the travel time between cities from days or months to mere hours, however, these local times became a scheduling nightmare. Railroad timetables in major cities listed dozens of different arrival and departure times for the same train, each linked to a different local time zone.

Efficient rail transportation demanded a more uniform time-keeping system. Rather than turning to the federal governments of the United States and Canada to create a North American system of time zones, the powerful railroad companies took it upon themselves to create a new time code system. The companies agreed to divide the continent into four time zones; the dividing lines adopted were very close to the ones we still use today.

Most Americans and Canadians quickly embraced their new time zones, since railroads were often their lifeblood and main link with the rest of the world. However, it was not until 1918 that Congress officially adopted the railroad time zones and put them under the supervision of the Interstate Commerce Commission.

Weekly Focus

For every complex problem, there is an answer that is clear, simple, and wrong.

H.L. Menken, American Journalist and Essayist

Wisdom too often never comes, so one ought not to reject it merely because it comes late.

Felix Frankfurter, Former Associate Justice of the Supreme Court of the United States