Week of September 23rd, 2024

Key Points for the Week

• The S&P 500 made a new high for the first time in nearly two months.
• Late September and October can be volatile in an election year.
• The Federal Reserve (Fed) cut interest rates by 0.50%-points.

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

In 2022, the United States Federal Reserve (Fed) began raising interest rates as it battled high rates of inflation. That year prices rose 8 percent, as measured by the Consumer Price Index. In 2023, prices increased more slowly (4.1 percent), but still advanced at a pace that was well above the Fed’s target rate of two percent. Last month, prices rose 2.5 percent annualized. Last week, the Fed decided it is time to change course.

“On Wednesday, policymakers indicated their rate cut would likely be the first of several through the end of next year. The median forecast among members of the Federal Open Market Committee was that the benchmark federal funds rate will be at 3.4 (percent) by the end of 2025, compared with the current targeted range of 4.75 (percent) to 5 (percent). This marks a significant shift. The Fed has moved from a phase when it kept rates high to combat inflation to one where it is lowering them to support the labor market and the broad economy.”

↳Elizabeth O’Brien and Shaina Mishkin, Barron’s

As borrowing costs move lower, other interest rates are likely to follow. Savers are likely to earn less on savings while borrowers (consumers, investors, and business owners) may have opportunities to:

• Pay lower interest rates on auto and home loans,
• Refinance mortgages at lower rates, and
• Tap into home equity at a lower cost.

Major U.S. stock indices rose on Thursday, following the Fed’s rate cut. “The S&P 500 climbed 1.7 (percent)—notching its 39th record in 2024 and extending this year’s surge to about 20 (percent). The Fed’s bold start to cutting interest rates and its determination not to fall behind the curve re-ignited hopes the central bank will be able to avoid a recession. Data Thursday showing a slide in jobless claims to the lowest since May signaled the labor market remains healthy despite a slowdown in hiring.”

↳Rita Nazareth, Bloomberg

Stocks gave back some gains on Friday but finished week higher. Yields on U.S. Treasuries were mixed over the week.

This Week in the Markets

The big story this week was the Fed cutting interest rates for the first time since March 2020.

First things first, why are they cutting? If they are cutting due to a panic (think March 2020) or due to an upcoming recession (like in 2001 or 2007) potential trouble could be ahead. If they are cutting to be proactive and avoid a recession, rate cuts may be beneficial. Some commentators feel that the Fed is, once again, behind the curve, and point to the yield on 10 year Treasuries, which were down over 0.50% prior to the Fed reduction.

Yes, stocks hit new highs across the board last week on optimism about an economy that may avoid a recession and a Fed that was now cutting rates. We would like to remind investors that the S&P 500 has closed higher nine of the past 10 months and it is now higher in the normally weak month of September. But it is late September when trouble tends to hit, so we are right in that area where we could see some volatility. Then do not forget that no month is worse during an election year than October, as pre-election jitters can be quite real and something we are monitoring.

Stocks reacted in a neutral way after the Federal Reserve’s historically significant decision to jumpstart the rate cutting cycle with a 0.5%-point cut. The real follow-through came on the day after the Fed meeting, when the S&P 500 surged to close at a new record high on Thursday, September 19 (the first since July 16).

In addition, Treasury yields for maturities over two years are now higher than they were relative to the day prior to the Fed meeting.

The key takeaway from the Fed meeting was that they are not willing to tolerate the unemployment rate moving much higher — their projections put the unemployment rate at 4.4% (it is currently at 4.2%). The Fed’s essentially putting a floor under the labor market.

Unlike in prior rate cutting cycles, the big rate cut was not a “panic cut.” The August retail sales report showed that online sales grew at an annualized pace of 15% over the past three months. Layoffs are also relatively low, but Fed Chair Powell said the time to support the labor market is when it is strong, not when you begin to see layoffs. In other words, the large cut was about risk management, with the Fed looking to get ahead of deteriorating labor market data.

The good news is that the Fed has room to support the labor market because inflation has eased a lot. An underrated factor here is lower energy prices. Beyond headline inflation, higher energy prices can even feed into core inflation numbers that the Fed typically focuses on. For example, higher energy prices can raise restaurant prices and airfares. WTI oil prices have pulled back by about 17% since early April.

All this is very positive for the economy. And if economic growth remains resilient, bond yields should not be moving lower. On the other hand, if investors did not believe the Fed and thought they were behind the curve, we would likely have seen bond yields fall, as investors priced in a higher risk of recession. For now, investors appear to be taking the Fed’s word that they are putting a floor under the labor market, and therefore the economy.

Equity markets have been reflecting this since last week, after a Wall Street Journal report published on September 12 suggested the Fed was considering a big cut. The rally on Thursday capped what was already happening. From September 11 through September 19, the S&P 500 rose 3%. But mid-and small-cap stocks, which are even more geared to economic growth, outperformed. The Russell Mid Cap index rose over 4% during this period, while the Russell 2000 small cap index rose over 7%. These still lag their large cap counterparts substantially year to date, but we believe there could be more follow-through to come, especially with the Fed backstopping 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.

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 24, 1789: The First Supreme Court is Established

On September 24, 1789, the Judiciary Act of 1789 was passed by Congress and signed by President George Washington, establishing the Supreme Court of the United States as a tribunal made up of six justices who were to serve on the court until death or retirement. That day, President Washington nominated John Jay to preside as chief justice, and John Rutledge, William Cushing, John Blair, Robert Harrison, and James Wilson to be associate justices. On September 26, all six appointments were confirmed by the U.S. Senate.

The U.S. Supreme Court was established by Article 3 of the U.S. Constitution. The Constitution granted the Supreme Court ultimate jurisdiction over all laws, especially those in which their constitutionality was at issue. The high court was also designated to oversee cases concerning treaties of the United States, foreign diplomats, admiralty practice and maritime jurisdiction. On February 1, 1790, the first session of the U.S. Supreme Court was held in New York City’s Royal Exchange Building.

The U.S. Supreme Court grew into the most important judicial body in the world in terms of its central place in the American political order. According to the Constitution, the size of the court is set by Congress, and the number of justices varied during the 19th century before stabilizing in 1869 at nine. This number, however, can be changed at any time by Congress.

Weekly Focus

A principle is not a principle until it costs you money.

William Bernbach, Advertising Executive

I have failed over and over and over again in my life, and that is why I succeed.

Michael Jordan, Professional Basketball Player