Interest rates and the Fed. Interest rates were key in September, as the Fed cut the federal funds rate by 50 basis points (bps) at its September meeting. This was the first interest rate cut in more than four years and signals a shift away from restrictive monetary policy from the central bank. The 50-bp cut was larger than most economists expected but aligned with market pricing heading into the meeting. Markets rallied following the announcement, as lower interest rates are generally viewed as a tailwind for investors and the economy.
Solid economic fundamentals. While the Fed was the major story in September, the economic updates released during the month were largely positive. Hiring rebounded in August and the unemployment rate fell to 4.2 percent during the month. Consumer and business spending came in above economist estimates in August, and we even saw continued progress in getting inflation back down to the Fed’s 2 percent target.
More rate cuts. The 50-bp cut in September was welcomed by investors, who now expect to see additional rate cuts at upcoming Fed meetings. Futures markets are pricing in at least two more interest rate cuts at the Fed’s meetings in November and December, and further cuts are expected in 2025. This will be an important area to monitor in the months ahead, as any changes to interest rates can immediately impact markets.
Slower growth. While the economic updates released in September largely pointed toward continued growth, it should be noted that economists expect to see slower growth ahead. We’ve seen a notable slowdown in the pace of hiring throughout the year, and the signs of weakness in the labor market contributed to the Fed’s decision to cut interest rates in September. While slower growth is still growth, the primary risk for U.S. investors is a further slowdown in economic activity as we finish the year.
Political uncertainty. Aside from economic risks, political risks remain. We’ll likely see politically driven uncertainty continue to ramp up as we approach the elections in November. Additionally, foreign risks should be monitored, notably the escalating conflicts in the Middle East and Ukraine, as well as the continued economic slowdown in China.
Ultimately, there are still risks to monitor. But on the whole, we are in a pretty good place as we look ahead to the fourth quarter. The economic fundamentals remain solid, and companies continue to report healthy levels of earnings growth. Additionally, the headwind from high interest rates we’ve seen over the past two years may finally transition to a tailwind in the months ahead.
While we may experience short-term setbacks, the most likely path forward includes continued economic growth and market appreciation.