Week of October 7th, 2024

Key Points for the Week

• Stocks are five months in a row and higher 10 of the past 11 months.
• We are currently in a bull market, but a pull-back, during the usually volatile month of October, may still occur.
• The September jobs report was positive — job growth was strong, the unemployment rate fell, and wage growth remained solid without being inflationary.

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

Asset allocation is important because it helps investors manage the risk and rewards of investing. In general, investments have different levels of risk and the potential return (or reward) for taking that level of risk is a higher return. For example, investing in stocks typically has greater risk than investing in quality bonds or cash. In return for taking a higher level of risk (i.e., tolerating the ups and downs of the stock market) investors have the potential to earn higher returns. Quality bonds have less risk that stocks and offer lower return potential, and cash/cash equivalents has the least risk and the lowest return potential.

During the third quarter of 2024—July through September—the stock market offered a lively ride that demonstrated the concept of risk and reward. Major U.S. stock indices bobbed up and down throughout July before dropping sharply in the first week of August when the July unemployment report lagged expectations. The news caused investors to wonder whether the Fed had waited too long to lower rates, the economy was slowing too quickly, and a recession might be ahead, reported Will Daniel of Fortune via Yahoo!Finance.

The stock market rebounded over the remainder of the month as inflation continued to trend lower and economic data remained robust. Then, during the first week of September, the number of new jobs created in August was lower than predicted and investor confidence stumbled again. Uncertainty led to a sharp—and short-lived—decline in stock prices. From that week on, U.S. stock prices trended higher.

Over the quarter, the dips and dives of the stock market made many investors’ stomachs drop, but by the end of the quarter, stock prices overall had moved higher.

Investors appear to have set aside worries about the U.S. economy.

“I have hesitated to say this at the risk of sounding hyperbolic, but with last week’s big GDP revisions, there is no denying it: This is among the best performing economies in my 35+ years as an economist. Economic growth is rip-roaring, with real GDP up 3 (percent) over the past year. Unemployment is low at near 4 (percent), consistent with full employment. Inflation is fast closing in on Fed’s 2 (percent) target—grocery prices, rents and gas prices are flat to down over the past more than a year. Households' financial obligations are light, and set to get lighter with the Fed cutting rates. House prices have never been higher, and most homeowners have more equity in their homes than ever. Corporate profits are robust, and the stock market is hitting a record high on a seemingly daily basis. Of course there are blemishes, as lower-income households are struggling financially, there is a severe shortage of affordable homes, and the government is running large budget deficits. And things could change quickly. There are plenty of threats. But in my time as an economist, the economy has rarely looked better.”

↳Mark Zandi, Chief Economist at Moody's Analytics

Last week, the S&P 500 Index and Dow Jones Industrial Average closed higher after the U.S. employment report showed 254,000 jobs were created in September. That was well above expectations. The number of jobs created in July and August were revised higher, too. Yields on many maturities of U.S. Treasuries moved higher last week.

This Week in the Markets

As we mentioned last week, October can be volatile and historically the S&P 500 has not done well in October during an election year, but the good news is November and December tend to be quite strong after the October seasonal weakness. Turning to times the S&P 500 was up at least 30% the previous 12 calendar months heading into October, there is reason to be on the lookout for some near-term weakness, as stocks fell five out of six times in October after such a strong prior year. It is worth noting that outside 1987, the S&P 500 did make gains the final two months of the year.

Big picture though, the underpinnings that got us to new highs and strong gains the past year are still alive and well.

One reason to expect potential higher prices over the next year? The S&P 500 is up five months in a row, and five-month win streaks tend to happen in bull markets and higher prices are the hallmark of bull markets.

Going all the way back to 1950, we found 29 other five-month win streaks and stocks were higher a year later 28 times, for a win rate of nearly 97%.

Strong Job Numbers

There has been valid concern that employment conditions are deteriorating, ever so slowly. The unemployment rate has increased from a low of 3.4% in April 2023 to 4.3% in July of this year. Hiring also seems to have pulled back a lot, with the Job Openings and Labor Turnover Survey (JOLTS) telling us that the hiring rate (hires as a percent of the labor force) has pulled back to 3.3% — a rate we last saw in 2013 (excluding the peak pandemic months in 2020).

The September payroll report went a long way to ease some of these concerns (which is not to say risks have disappeared). Payrolls grew by 254,000 in September, doubling expectations for a 125,000 increase. Monthly payrolls can be noisy and subject to revisions, but July and August payrolls were revised higher, taking the 3-month average to a solid 186,000. This report also takes on outsized significance because the next two payroll reports are likely to be impacted by Hurricane Helene, with job growth pulled lower in October and reversing in November. The good news is that the port strike has ended, and so that will be a non-factor.  In any case, it is going to be January (when we get December payroll data) before we get another “clean” report.

Additional good news was the unemployment rate easing to 4.1%. It was 4.051%, very close from being rounded down to 4.0%. Rather than the unemployment rate, we prefer looking at the “prime-age” (25-54 years) employment-population ratio, since it gets around definitional issues that crop up with the unemployment rate (someone is counted as being “unemployed” only if they are “actively looking for a job”) or demographics (an aging population with more people retiring and leaving the labor force every day). The prime-age employment population ratio was unchanged at 80.9% in September. That is higher than anything we saw between 2001 and 2019 (when it peaked at 80.4%).

The fact that the unemployment rate and the prime-age employment population ratio are pointing in the same direction is positive.

Income Growth and Productivity Are Driving the Economy

Over the last three months, wage growth has run at an annualized pace of 4.3%, which is solid but should not raise anyone’s inflation hackles. If you combine wage growth with employment growth and hours worked, we get a sense of aggregate income growth across all workers in the economy. Right now, that is running at a 3-month annualized pace of 4.4%. If you are wondering why economic growth keeps exceeding a lot of people’s expectations, especially after recent upward revisions, here is why: Income growth is powering the economy, as opposed to credit. That is perhaps why this cycle has confounded a lot of people, since we have not seen something like this in decades. In fact, consumer credit is up only 1.6% year over year as of the second quarter of 2024, versus 4.6% in 2019, 5.9% in 2006, and 7.8% in 1999. M2 reflects credit to the private sector, and that is simply not growing as it has in prior cycles.

Keep in mind that inflation may have normalized to around 2% (and would probably be running slightly lower, if not for lagged effects of shelter). Strong wage growth and output growth amid benign inflation implies productivity growth is strong. Crucially, that also means the Federal Reserve can continue easing interest rates, and that is going to be a tailwind for the economy, and markets.

But Can We Believe the Data?

The same people who keep calling for a recession, also tend to call the economic data into question. Admittedly, we have seen significant revisions to the data. Employment between April 2023 and March 2024 was revised down by 818,000. The payroll growth chart shared above does account for this downward revision, and despite that, growth was solid during the revised period. Revisions can go the other way too, as we saw with recent GDP/GDI and savings rate revisions, all significantly positive.

The S&P 500 earned strong gains over the first nine months of the year, and over half of that return has been powered by corporate profit growth. Since the end of 2019, the S&P 500 is up significantly. We can divide that up into three key pieces that make overall returns:

• Earnings growth has contributed 57%-points
• Dividends contributed 14%-points
• Valuation multiple growth contributed 21%-points

In other words, most of the returns have come from profits (and dividends). Profit expectations continue to move higher, driven by strong sales growth (which tells you that the economy is doing well) and profits margin growth (which tells you companies are in good shape and have operating leverage).

At the end of the day, profits come from the economy, and that is what drives market returns. So, if you do not want to believe economic data, hopefully you can believe what markets are telling us about the economy.

The Federal Deficit

As the political campaigns keep promising free money, either through tax cuts or new spending programs, it is wise to look at the Federal debt. The CBO recently released the August figures for fiscal 2024. Tax receipts are projected to rise by 11% for the year, topping $4.4 TRILLION. Spending, however, was also up, and expected to exceed $6.3 Trillion. The worrisome figure, to us, was the $847 Billion of interest expense incurred on the National debt.

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 10, 1845: U.S. Naval Academy Opens

The United States Naval Academy opened in Annapolis, Maryland, with 50 midshipmen students and seven professors. Known as the Naval School until 1850, the curriculum included mathematics and navigation, gunnery and steam, chemistry, English, natural philosophy, and French.

The Naval School officially became the U.S. Naval Academy in 1850, and a new curriculum went into effect, requiring midshipmen to study at the academy for four years and to train aboard ships each summer—the basic format that remains at the academy to this day.

Weekly Focus

Progress is impossible without change; and those who cannot change their minds cannot change anything.

George Bernard Shaw, Irish Playwright and Critic

The problem with socialism is that you eventually run out of other people’s money.

Margaret Thatcher, Former Prime Minister of the United Kingdom