Week of October 14th, 2024

Key Points for the Week

• The bull market turned two on Saturday.
• Two years is a long time, but the average bull market has lasted more than five years.
• Consumer Price Index (CPI) inflation for September came in a little higher than expected but the 2.4% increase over the past year is the slowest pace since March 2021.
• The positive disinflationary trend is still firmly in place and there was some good news beneath the surface.

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

The Standard & Poor’s 500 Index closed above 5,800 for the first time.

The Dow Jones Industrial Average also notched a record high last week—and all three major U.S. stock indices ended the first full week of October with gains of more than one percent.

There was good economic news, too.

• Inflation continued to slow in September. The Consumer Price Index showed headline inflation was 2.4 percent annualized—the smallest annual increase since February 2021.
• Consumers are feeling better than they did a year ago. “(Consumer sentiment) is currently 8 (percent) stronger than a year ago and almost 40 (percent) above the trough reached in June 2022.”

↳Joanne Hsu, University of Michigan Surveys of Consumers Director

• The economy continues to grow. After inflation, the U.S. economy grew by 3 percent in the second quarter of 2024. Forecasts project that economic growth in the third quarter will be 3.2 percent.
• Wages have finally grown faster than inflation. In September 2024, average hourly earnings were up 4 percent. After inflation, they were up 1.5 percent. Of course, that is a broad reading for the entire country and may not reflect individual experience.

“By just about every measure, the U.S. economy is in good shape. Growth is strong. Unemployment is low. Inflation is back down. More important, many Americans are getting sizable pay raises, and middle-class wealth has surged to record levels. We are living through one of the best economic years of many people’s lifetimes…The United States has nearly 7 million more jobs than it did before the pandemic, and the largest share of 25- to 54-year-olds working since 2001.”

↳Heather Long, The Washington Post

It is remarkable that many Americans still do not recognize the strength of the economy. Last week, a Harvard Caps/Harris Poll found that, “63 (percent) of voters believe the U.S. economy is on the wrong track and 62 (percent) characterize it as weak, consistent with perceptions over the past year.”

Last week, major U.S. stock indexes finished higher. U.S. bonds appeared to be headed for a fourth-straight week of declines with the yield on a 10-year note above 4 percent again.

This Week in the Markets

The S&P 500 is now up five weeks in a row, something it has done only two other times so far this year, falling during the sixth week each time. In fact, it has not been up six weeks in a row since late 2023.

As we have noted in the past few weeks, October in election years can produce volatility. The good news is this bull market is still alive.

Last Saturday marked the official two-year birthday of the bull market that started on October 12, 2022. That was a vicious 25% bear market made worse by also having some of worst bond market performance ever.

This bull market is quite young, historically speaking. The average bull market since 1950 lasts more than five years and gains more than 180%. How long this bull will last is anyone’s guess.

Will this bull market make it to three? We found that out of 16 previous bull markets (after bear or near bear markets), 12 of them made it to their third birthday, with an average gain of about 8% and a median return of nearly 10% in year three, pretty much what your average year does.

Inflation

The Consumer Price Index (CPI) was higher than expected in September. Headline CPI rose 0.2% month over month while core CPI (excluding food and energy) rose 0.3%. Cue the worries about resurgent inflation. The big picture takeaway remains fundamentally positive, and there’s even good news in some of the details.

Here is the headline: CPI is up 2.4% year over year, which is the slowest pace since March 2021. A year ago, it was 3.7%. Even better, we have been seeing inflation running even lower lately over the last three months, inflation has run at an annualized pace of just 2.1%.

Core CPI is up 3.3% over the past year and is running at a 3.1% annualized pace over the last three months. The elevated core numbers are due to lagging shelter inflation within official data (shelter makes up 44% of core CPI).

Shelter inflation that happened in 2021 – early 2022 is still showing up in the data (though there’s good news here). If you exclude shelter, here’s how CPI looks (this includes energy and food):

• Last 3 months: +0.7% (annualized)
• Last 6 months: +0.1% (annualized)
• Last 12 months: +1.1%

September “Heat” Is Not Abnormal

Even during normal or low inflation periods, it is common to get readings like what we saw in September. Between January 2017 and February 2020 (pre-pandemic), headline CPI inflation average 2.1%, and core averaged 2.2% (annualized). The chart below shows monthly inflation numbers (headline and core) over this period. Headline readings above 0.2% were common, and we got several core readings near 0.3%. In short, this is what “normal” looks like. Keep in mind that lagging shelter inflation data is keeping current numbers elevated, with a bigger impact on core inflation.

Good News on the Shelter Front

Official shelter inflation data is showing signs of normalization.

Rents of primary residences (10% of the core CPI basket) rose at an annualized pace of 4.1% in September, well below the 6.2% pace in August and not far above the pre-pandemic pace of 3.2%. Owners’ Equivalent Rent (OER) makes up a whopping 34% of the core CPI basket — it is the “implied” rent homeowners pay and is based on market rents as opposed to home prices. OER rose at an annualized pace of just 3.4% in September, which is slightly below the pre-pandemic pace of 3.6%.

Looking back over the last 12 months, shelter remains very elevated relative to what we saw before the pandemic — rents are up 5.2% year over year and OER is up 4.8%. This is essentially why the headline and core CPI numbers quoted widely in the press are reflecting a hotter inflation story than is the case. September is just one month, but this is extremely encouraging data.

Looking ahead, there may be more shelter disinflation to come in the official numbers. Markets rents are still declining. The Apartment List rental index is down 0.7% since last year, the 16 th straight month with a negative year-over-year reading. Official shelter data is declining slowly but surely. We may get to a point where the readings are lower than what we saw pre pandemic, potentially pulling inflation numbers lower over the next year.

Profit Margins Are Also Telling Us Inflation Has Normalized

There was some heat in certain categories that offset the positive data on the shelter side. Airfares rose 3.2%, while apparel and vehicle prices also rose. This probably reflects how the data is seasonally adjusted more than anything else. Motor vehicle insurance premiums also rose, but this is likely a lagged impact of higher vehicle prices. With vehicle prices pulling back (at least in the private market data), insurance premium increases should start to ease.

But even during “normal” inflationary periods, you always get idiosyncratic areas that see hotter inflation. That does not mean broad-based inflation is going to surge.

Case in point: profit margins. The producer price index (PPI) measures input price inflation for businesses. However close to a quarter of the PPI basket that excludes food and energy is made up of “trade services,” which measures profit margins for retailers and wholesalers. Margins are up 29% since before the pandemic (February 2020), but as you can see in the chart below (top panel), they’ve flatlined over the last two years.

Back in 2022, when inflation was hitting its peak, profit margins were up a massive 19% year over year (March 2022). The good news is that as of September, profit margins for retailers/wholesalers were up 1.6% over the past year (bottom panel of the chart), which is in line with what we saw before the pandemic in 2019. This is more evidence that inflation has normalized.

There is some concern that inflation is surging even as economic activity remains strong, the “no-landing” scenario. Real GDP is up 3% year over year as of the second quarter of 2024 and is expected to rise at a similar pace in the third quarter, based on “NowCast” estimates from the Federal Reserve Bank of Atalanta. However, as I discussed above, inflation is normalizing, but the way to reconcile this with stronger growth is via stronger productivity growth.

All of this means the Federal Reserve can continue to normalize interest rates. They may not have to go with a big cut at every meeting, like the 0.5%-point cut they made in September, especially with the labor market looking a little better than what the summer data showed. They can cut gradually, and that could be a big tailwind for the economy, and markets, as we go into 2025.

It Is Policy That Affects Stock Markets, Not Politics

Although presidential elections can affect financial markets over the short term, it is the policies a new President introduces that influence economic growth and the stock market. Sometimes, policies lift the economy. Other times, they do not. For example:

President Thomas Jefferson embargoed all trade with England and France, preventing U.S. ships from doing business with other countries. While he had sound reasons for pursuing the policy.

“It decimated the economy…As many as half of the working men in the New England coastal communities were unemployed. Poor houses were overflowed, banks failed."

↳WBUR

The embargo was not popular. Eventually, American merchants found loopholes that allowed them to trade with Canada and Spanish Florida. Smuggling also increased.

President Jimmy Carter faced an embargo—the Arab oil embargo of 1973. Demand for gasoline far outstripped supply in the United States, and Americans waited in long lines to fill their cars’ gas tanks. In response, the President developed energy conservation strategies.

“President Carter signed energy legislation that created the U.S. Department of Energy, provided incentives for renewables and coal, deregulated oil, and natural gas prices, and banned new power plants from using gas or oil. Some of these policies have had a lasting effect. Others drew criticism and were ultimately repealed.”

↳Historian Jay Hakes on a Center for Global Energy Policy podcast at Columbia University

While there are usually differences of opinion when new policies are implemented, the economic outcome is sometimes difficult to predict.

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.

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

October 14, 1892: “The Adventures of Sherlock Holmes” Published

On October 14, 1892, The Adventures of Sherlock Holmes, by Arthur Conan Doyle, was published. The book was the first collection of Holmes stories, which Conan Doyle had been publishing in magazines since 1887.

Conan Doyle was born in Scotland and studied medicine at the University of Edinburgh, where he met Dr. Joseph Bell, a teacher with extraordinary deductive power. Bell partly inspired Doyle’s character Sherlock Holmes years later.

After medical school, Conan Doyle moved to London, where his slow medical practice left him ample free time to write. His first Sherlock Holmes story, “A Study in Scarlet,” was published in Beeton’s Christmas Annual in 1887. Starting in 1891, a series of Holmes stories appeared in The Strand magazine, and Conan Doyle was able to give up his medical practice and devote himself to writing.

Later collections include The Memoirs of Sherlock Holmes (1894), The Return of Sherlock Holmes (1905), and The Casebook of Sherlock Holmes (1927). In 1902, Conan Doyle was knighted for his work with a field hospital in South Africa. In addition to dozens of Sherlock Holmes stories and several novels, Conan Doyle wrote history, pursued whaling, and engaged in many adventures and athletic endeavors. After his son died in World War I, Conan Doyle became a dedicated spiritualist. He died in 1930.

Weekly Focus

One small crack does not mean you are broken. It means that you were put to the test and you did not fall apart.

Linda Poindexter, Episcopal Priest

Theology is necessary because man is by nature a fanatic.

Gerhard, Ebeling, Theologian