Week of September 16th, 2024

Key Points for the Week

• High-yield corporate bonds continue to hit multi-year highs.
• The Fed is widely expected to start cutting rates, but the size of the first cut is still uncertain.

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

Inflation continued to trend lower. The Consumer Price Index showed that inflation was 2.5 percent year over year in August. That is lower than economists had expected, and a significant decline from July’s 2.9 percent.

Food and energy prices have been falling faster than some other prices because the core CPI, which excludes food and energy, showed a 3.2 percent increase over the last 12 months. The biggest price increases were for shelter (+5.2 percent) and automobile insurance (+16.5 percent).

Consumers are happier. The University of Michigan’s Consumer Sentiment Survey found that optimism is on the rise.

“Year-ahead expectations for personal finances and the economy both improved as well, despite a modest weakening in views of labor markets. Sentiment is now about 40 (percent) above its June 2022 low, though consumers remain guarded as the looming election continues to generate substantial uncertainty. Year-ahead inflation expectations fell for the fourth straight month, coming in at 2.7 (percent).”

↳Joanne Hsu, Surveys of Consumers Director

Household net worth is up in the United States. Last week, the Federal Reserve reported on the financial well-being of households and nonprofit organizations at the end of June 2024. Over the last decade household and nonprofit net worth has risen from $85 trillion (2Q 2014) to $164 trillion (2Q 2024).

“U.S. household wealth reached a fresh record in the second quarter, fueled by a steady rise in the value of real estate and Americans’ stock holdings...The value of real estate held by households climbed about $1.75 trillion, the most in a year, while the value of equity holdings rose about $662 billion.”

↳Vince Golle, Bloomberg

It is important to note that not all Americans participate equally as wealth grows. The top 10 percent of households hold 67 percent of all household wealth, while the bottom 50 percent hold just 2.5 percent, according to the St. Louis Federal Reserve.

Stocks and bonds had a good week. Last week, major U.S. stock indices moved higher, and U.S. Treasury bonds rallied as yields on all maturities of Treasuries moved lower.

This Week in the Markets

The first week of September was the worst week since March 2023 for the S&P 500 index. Last week the index was higher all five days of the week, completing a perfect week. Interestingly, August also had a perfect week, making this the first time since September and October 2019 we saw back-to-back months with a perfect week.

On Wednesday stocks initially dropped after inflation data came in higher than expected. The S&P 500 reacted dropping in the first 90 minutes of the trading session. Then an interesting thing occurred — a huge reversal took place, with stocks closing the day up more than 1%. You must go back to mid October 2022 and the end to that vicious bear market for the last time we saw a reversal like that.

There have been 22 other times since 1970 that the S&P 500 was down at least 1.5% intraday but up more than 1% at close. A year later the index was up a median of more than 16%, with the near-term returns above average as well.

One more positive is the action in high-yield corporate bonds. These are companies that have lower credit ratings, so if you loan them money you might not get paid back. As a result, they have to offer higher yields on their debt.

The Federal Reserve

The Federal Reserve’s next policy meeting will conclude on Wednesday, September 18 and it is going to be a big one. The stock and bond markets believe that the Fed will almost certainly begin cutting the Fed Funds rate, ending the most aggressive rate hiking regime since the early 1980s. No matter what the Fed does, policy will still be in restrictive territory, but the direction matters.

The big question is whether the Fed will do a “normal” 0.25%-point cut or go big and do a 0.50%-point cut. Based on fed fund futures prices, the market currently sees a 59% of the Fed going big and a 41% chance of the Fed going with a normal cut.

Labor market risks are rising, and the August payroll data was disappointing. At the same time, the latest inflation data was positive. In short, risks to the Fed’s employment mandate are a lot higher than the risks to their inflation mandate right now. Even if these risks were perceived to be “balanced,” policy rates are well above normal and so the case for normalizing sooner rather later seems clear. Early in the week it looked like the Fed was poised to start cutting rates gradually, with markets penciling in a 0.25%-point cut at their September meeting with close to 85% probability as of Wednesday, September 11.

This was upended on Thursday, September 12. Famed “Fed Whisperer” Nick Timiraos (a reporter at the Wall Street Journal), wrote a piece laying out various arguments for a large cut by former Fed officials and even a former senior advisor to Fed Chair Powell. The signal was clear: there is no internal consensus at the Fed. It is likely going to come down to Powell, who was the one Fed official who has not used language like “gradual” or “careful” in describing the expected policy path. Instead, in his speech at Jackson Hole three weeks ago, he said that the Fed would not tolerate further labor market weakening. Timiraos’s comments in the context of Powell’s Jackson Hole speech has the odds of a 0.50%-point cut drifting towards being a small favorite as of this writing.

Would a Large Cut Signal Recession and Hit Stocks?

There has been a lot of handwringing over whether a large cut up front is risky and would adversely hit stocks. The argument is that it signals panic, and perhaps signals that the Fed knows something that the rest of us do not. However, if anything has been clear over the last few years, it is that the Fed does not have any more information than the rest of us. Instead, a Fed that falls increasingly behind the curve as labor market indicators remain in a downtrend is probably more likely to be more detrimental for stocks.

There is also a concern that Fed “panic cuts” have historically signaled a recession ahead. But context is important. Below we put together a chart showing what stocks did after historical rate cut cycles began. Except for 1989, the 0.50%-point cuts all coincided with recessions – 1990, 2001, 2007, and 2020 – and stocks were hit over the next 3-6 months. But here is the thing – in each of these cases, the Fed was well behind the curve and was playing catch-up. The economy was already in a recession, or close to one, by the time they began cutting rates.

• The 1990 recession started in July 1990 (the Fed went 0.50%-points in July)
• The 2001 recession started in March 2001 (the Fed cut in January)
• The 2007 recession started in December 2007 (the Fed cut in September)
• The 2020 recession started in March 2020 (the Fed cut in March amid the Covid panic)

Take the “recession cuts” out, and stocks did quite well over the following 3-12 months.

The good news is that we are not in the middle of a recession now. It is just that a Fed that falls behind the curve leads to rising recession risks 6-12 months from now. Subjectively, we would say the odds of a recession are about 25% right now, so it is not at all our base case, but a lot depends on the Fed getting ahead of the labor market data.

Ironically, despite more uncertainty now about how the Fed will start this rate cut cycle, markets have responded well to the possibility of the Fed going big, the S&P 500 rising strongly since Timiraos’s article was released and the Russell 2000 Index of small cap stocks up even more strongly. It is still early, but all signs are that the market does not seem to be thinking a 0.50%-point cut would be a recessionary panic cut either.

Which Is More Popular: Butter, Ice Cream, Yogurt, or Cheese?

“America’s per capita cheese consumption has more than doubled since the government began keeping track in 1975, to about 42 pounds a year—more than all the butter, ice cream and yogurt combined.”

↳Ilena Peng, Bloomberg

When it comes to dairy products, cheese is the big cheese. As milk consumption has declined, cheese eating has accelerated. According to the United States Department of Agriculture (USDA), rising demand for cheese has become “one of the most important forces shaping the U.S. dairy industry.”

The popularity of cheese owes much to the pandemic, according to Bloomberg’s Peng. It may be that working from home improved proximity to refrigerators or that efforts to recreate favorite restaurant meals elevated demand for cheesy goodness.

Either way, the global market for cheese is growing, and the cheese snack market is expected to expand at a compound annual growth rate of 6.5 (percent) through 2034, reported Corey Geiger, Abbi Prins and Billy Roberts for the CoBank Knowledge Exchange. According to one company’s survey, the most-produced, top-selling, and most widely eaten cheeses in the U.S. include:

• Cheddar,
• Mozzarella,
• Parmesan,
• American, and
• Cream cheese.

That list did not include cottage cheese, which has been having a moment on social media.

“People have taken to [a social media site] to show how cottage cheese can be used in better-for-you recipes, with creative dishes like viral cottage cheese flatbread and ice cream. At-home followers looking to recreate these recipes have helped cottage cheese boost dairy sales. According to Circana data from May, cottage cheese sales were up 13.5 [percent] year-over-year, up to $1.33 billion.”

↳Gabriela Barkho, Modern Retail

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.

IRS Online Account and Identity Protection PINs

Taxpayers are protecting themselves from identity thieves by using the IRS Identity Protection PINs. It’s encouraged by the IRS for taxpayers to get an IP PIN and establish their IRS Online Account. These tools help guard against fraudsters trying to steal personal and financial information.

Important things to know about an IP PIN

• It's a six-digit number known only to the taxpayer and the IRS.
• The program is voluntary, though it’s strongly encouraged.
• In cases of proven identity theft, taxpayers will be assigned an IP PIN.
• The IP PIN should be entered on the electronic tax return when prompted by the software product or on a paper return next to the signature line.
• Only taxpayers who can verify their identity can get an IP PIN.
• Tax professionals cannot get an IP PIN on behalf of their clients.
• Each IP PIN is valid for one year. When it expires, a new one is generated for security reasons.
• Some participants will receive their IP PIN in the mail. Others will have to log in to the Get an IP PIN tool to get their IP PIN.
• Taxpayers already enrolled in the program can log in to the Get an IP PIN tool to see their current IP PIN.
• Taxpayers with an IP PIN must use it when filing any federal tax returns during the year, including prior year tax returns or amended returns.
• IP PIN users should share their number only with the IRS and their tax preparation provider.
• The IRS will never call, email, or text the taxpayer to request their IP PIN.

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

September 17, 1976: NASA Unveils First Space Shuttle, the Enterprise

On September 17, 1976, NASA publicly unveiled its first space shuttle, the Enterprise, during a ceremony in Palmdale, California. Development of the aircraft-like spacecraft cost almost $10 billion and took nearly a decade. In 1977, the Enterprise became the first space shuttle to fly freely when it was lifted to a height of 25,000 feet by a Boeing 747 airplane and then released, gliding back to Edwards Air Force Base on its own accord.

Regular flights of the space shuttle began on April 12, 1981, with the launching of Columbia from Cape Canaveral, Florida. Launched by two solid rocket boosters and an external tank, only the aircraft-like shuttle entered orbit around Earth. When the two-day mission was completed, the shuttle fired engines to reduce speed and, after descending through the atmosphere, landed like a glider at California’s Edwards Air Force Base. Early shuttles took satellite equipment into space and carried out various scientific experiments.

Weekly Focus

A party without cake is really just a meeting.

Julia Child, American Chef and Author

When someone on social media tells you it’s raining, the traditional media’s job is to look out the window.

Helen Lewis, British Journalist and Writer