Week of September 30th, 2024

Key Points for the Week

• October is historically a very volatile month, so some potential pre election volatility would nbe perfectly normal.
• The fourth quarter is historically a strong period for stocks.
• With strong household balance sheets, lower interest rates, and a Federal Reserve more focused on jobs, there is fundamental support for markets.

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 S&P 500 has had quite a year. Despite a sharp downturn in August when investor confidence was ruffled by concerns about economic growth, the stock market has posted substantial gains, as of the end of last week. The gains were widespread with all sectors of the Index participating, according to data from Fidelity.

Last week, investor enthusiasm was bubbling up. There were a lot of reasons for their optimism. First, investors were encouraged by the Federal Reserve’s rate reduction earlier this month and expectations that the Fed will continue to reduce the federal funds rate further to support economic growth.

“Lower rates would only boost consumer spending on housing and other goods and services—a demand picture that will spur investment from companies, helping the industrial economy specifically. This all means companies’ profit growth could easily extend from next year into 2026. Analysts expect S&P 500 companies, in aggregate, to generate annual sales growth just above 5 (percent) over the coming two years, according to FactSet.”

↳Jacob Sonenshine, Barron’s

Second, a round of positive economic news helped investors set aside any lingering concerns about economic growth.

“A slate of fresh data supported a solid economy, easing fears that perhaps the Federal Reserve is cutting rates aggressively because of a potential slowdown. Weekly jobless claims fell more than expected, pointing to a steady labor market. Durable goods orders for August were unchanged versus economists’ expectations for a decline. Further, the final reading of second-quarter GDP was unrevised at a strong 3 (percent).”

↳Brian Evans and Lisa Kailai Han, CNBC

In addition, inflation continued to trend lower in August. The Fed’s favored inflation gauge, the personal consumption expenditures index, indicated prices rose 0.1 percent.

“The August pace (of inflation) was also lower than consensus calls…The latest data show that the annualized three-month core PCE is currently running below the Fed’s 2 (percent) inflation target. It should help erase any doubts that the Federal Open Market Committee made the right call when it slashed benchmark interest rates by a half percentage point earlier this month.”

↳Megan Leonhardt, Barron’s

Last week, the S&P hit a new all-time high, as well as a record close. The Dow Jones Industrial Average and Nasdaq Composite Index also rose last week. After rising earlier in the week, yields on many maturities of U.S. Treasuries moved lower on Friday after inflation news shored up expectations for further Fed rate cuts.

This Week in the Markets

Stocks had a volatile start to September, but the bull market continued. Assuming September holdsn up, stocks would be up eight of the first nine months of the year (with only the usually bullish month of April in the red) and up 10 of 11 months going back to last November.

The performance of the stock market, in September, has defied the historical performance of September (past performance is not indicative of future performance). Some market commentators even feel that the stock market could rally through the end of the year and defy the typical October decline that has occurred in previous election years. There are reasons to believe that this is possible: including strong corporate profits; a stronger economy as the most recent GDP rose at annual pace of 3%; and, the recent cut in interest rates by the Federal Reserve.

Our concern is that the Middle East fighting continues escalating. We are not predicting further escalation, but we would not be surprised if the fighting continues to escalate eventually leading to a direct conflict between Iran and Israel. If this were to happen, the supply of oil could be curtailed, and the price of oil could rise dramatically. A long conflict would have major negative ramifications for both the United States and the global economy.

The other concern, for the stock market, is the strike by the Longshoreman. Each day that the strike continues, hurts the economy. There are wildly different estimates as to the cost but the cost is substantial. To the extent that the strike impacts the economy, the ripple effect may impact the stock market.

The Economy

There were several economic data revisions from the Bureau of Economic Analysis (BEA). A lot of this is backward-looking data, but it is important to (re) level-set where we are, and the momentum associated with that. Even though it is a revision of old data, it shifts the forward-looking perspective, because we are standing in a different place than we thought.

To start: GDP growth over the last 5 years was revised up. From the end of 2019 through 2024 Q2, real GDP growth was revised up from 9.4% to 10.7%. Here is some perspective on that upward revision of 1.3%-points:

• Germany grew just 0.3% over the entire period (hard to call it “growth”)
• The UK grew 2.3%
• Japan grew 3.0%

The chart below compares Congressional Budget Office (CBO) pre-pandemic projections for growth to actual growth. Actual real GDP growth is running 2.3% above what the CBO projected back in January 2020. Remember, this is after a worldwide pandemic, 40+ year highs in inflation, and an ultra-aggressive Fed. There is a reason why the S&P 500 has risen over 90% over this same period, and that was because economic activity drove profit growth.

With the revision there was no “technical recession” in 2022. A technical recession is colloquially described as two consecutive quarters of negative GDP growth. However, it is typically used for countries other than the US. That is because in the US, a recession is officially “dated” by the National Bureau of Economic Research (NBER). The NBER recession dating committee does not use GDP (or GDI), instead focusing on six other economic indicators measuring consumption, income, employment, sales, and production. The prior data showed that GDP growth was negative in Q1 and Q2 of 2022. After the revision, Q2 2022 GDP growth was moved up, and now we do not have two consecutive quarters of negative GDP growth.

Over the last two years, real GDP growth has clocked in at an annualized pace of 2.9%, and over the last year it is up 3.0%. The economy grew at an annualized pace of 2.4% over the entire 2010-2019 era, and even over the relatively stronger 2017-2019 period, it grew only 2.8%.

That is obviously backward-looking data, but as of now, the Atlanta Fed is projecting Q3 GDP growth at 3.1%, on the back of strong consumption and investment spending. The momentum continues.

Consumers Are in Better Shape Than We Thought

Gross domestic income (GDI), a different way of measuring total economic activity, was also revised up on the back of stronger income growth for households and corporations (i.e. profits). Disposable income for households was revised higher, even as durable goods consumption was revised down (Turns out Americans did not spend as much on durable goods like cars and recreational goods as we first thought.) As a result, the savings rate was revised up from 3.3% to 5.2% in Q2 2024. That is lower than the 2019 average of 7.3%, but not that much lower. And remember that 2019 came at the end of a massive deleveraging cycle, as households were repairing their balance sheets after the financial crisis, which had crushed stock and home prices.

The Manufacturing Sector

Survey data from the manufacturing sector have told us that the manufacturing sector has been in contraction for the last two years. The ISM Manufacturing PMI (a survey of purchasing managers) averaged 48.8 in Q2 2024 (any reading below 50 indicates the sector is in contraction), but with the GDP/GDI data, we also got “industry value add” data, which is a third way to measure overall economic activity, this time aggregating output across various private sector categories, and the public sector. Turns out, real GDP grew 3.0% annualized in Q2 2024, and of that, 0.79%-points came from the manufacturing sector. That is a quarter of the growth rate contributed by a sector that makes up just about 10% of the economy, and supposedly is in a recession. Over the last year, through Q2 2024, real manufacturing output has increased by 3.9%.

__The Investment and Productivity Story __

A big driver of upward revisions to GDP was investment, which more than overcame the downward revision to goods consumption over the last few years. We have previously written about productivity, and how tight labor markets and investment are key to its growth. Productivity gains allow for strong wage growth without excessive inflation.

Upward GDP growth revisions imply productivity growth is likely stronger than reported. It was already strong, running at a 2.9% annualized pace over the last five quarters (compared to a 1.5% annualized pace from 2005-2019). Income growth has been strong as well, with employee compensation running up over 6% over the past year through August. Yet, inflation has continuously eased. The core personal consumption expenditures index (PCE), which is the Fed’s preferred inflation metric, has eased from 3.8% a year ago to 2.7% as of August 2024. Over the last three months, it is running at a 2.1% annualized pace, barely above the Federal Reserve’s (Fed) 2% target.

A strong labor market is key to productivity growth, boosting investment and keeping inflation benign. That will allow the Fed to continue easing interest rates, which will be a tailwind for the economy and markets.

Home Buying and Selling

Mortgage rates have been moving lower. Last week, the average 30-year fixed rate mortgage dropped to the lowest level in two years, reported Claire Boston of Yahoo! Finance. This was welcome news to anyone hoping to buy a home.

Climate conscious buyers are also likely to be enthusiastic about a new feature being rolled out by an online real estate marketplace. The digital listing service is partnering with a climate risk financial modeling group to provide additional climate risk information to buyers.

“When viewing a for-sale property…home shoppers will see a new climate risk section. This section includes a separate module for each risk category flood, wildfire, wind, heat, and air quality—giving detailed, property specific data…This section not only shows how these risks might affect the home now and, in the future, but also provides crucial information on wind, fire and flood insurance requirements.”

↳Zillow

About 80 percent of home buyers consider at least one climate risk when shopping for a house, according to a recent survey. Home buyers in the Western and Northeastern United States are more likely to be aware of and concerned about the impact of climate risks, while about a third of Midwestern and Southern home shoppers say climate factors are not a significant concern as they search for real estate.

The wisdom of considering climate risks when making major financial purchases has been evident in recent weeks as Hurricane Helene left a trail of destruction across Florida and the southeastern United States, Hurricane Francine tore into Louisiana, and flooding and wildfires have plagued regions of the United States.

It is also critical to consider whether a property is insurable and how much the insurance will cost. The climate risk financial modeling group found that “about 35.6 million properties—a quarter of all U.S. real estate—are facing higher insurance costs and lower coverage because of climate risks.”

Li Cohen, Tracy J. Wholf, and Marina Jurica, CBS News

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

October 2, 1965: Gatorade First Tested in a College Football Game

On October 2, 1965, during a football game between the University of Florida Gators and the Louisiana State University Tigers, UF players tested a newly concocted sports drink to help them regain the essential chemicals their bodies lose from profuse sweating. Developed in their own school's science labs, the drink was designed to fight dehydration, rebalance their bodies' electrolytes and restore blood sugar, potassium, and body salts so they could continue to perform at a high level through their games. The Gators went on to win the match, after the heavily favored Tigers wilt in Florida's muggy, 102-degree heat. The drink, nicknamed " "Gatorade", eventually becomes a mass-market phenomenon and made its inventors wealthy.

Early in the summer of 1965, University of Florida assistant football coach Dewayne Douglas met a group of scientists on campus to determine why many of Florida's players were so negatively affected by heat. To replace bodily fluids lost during physical exertion, University of Florida's Dr. James Robert Cade, and his team of researchers—doctors H. James Free, Dana Shires and Alex de Quesada—created the now-ubiquitous sports drink. In its early days, Gatorade was not a hit with players. The drink reportedly tasted so awful that some athletes vomited after consuming it. Things got more palatable after Dr. Cade's wife suggested adding lemon juice.

But it proved effective for rehydrating players, and helped improved the team's performance; they became known as a second-half team that no longer sagged in the heat. By 2015, royalties for the group that invented Gatorade had eclipsed $1 billion.

Weekly Focus

You are only young once, but you can be immature forever.

Ogden Nash, American Poet

If everyone is thinking alike, then no one is thinking.

Benjamin Franklin, American Polymath