The Markets, the National Debt, and the Election
THE MARKETS
In prior commentaries, I’ve discussed the “Fed watch” game. When would the Fed cut interest rates? By how much? With every consensus “guess” in one direction or the other, the markets bounced pretty much in lockstep. The Fed answered the questions in late September with a larger than expected rate cut of 50 basis points (one half of one percent). The markets reacted favorably with strong returns in every asset class.
In the past I’ve also devoted a lot of ink to the “Magnificent 7” big tech stocks that have dominated the market, accounting for most of the major index returns. The third quarter saw a reversal as the big tech Nasdaq composite index returned 2.1%, while the S&P index gained 5.9%. Nonetheless, the Mag 7 still accounted for 45% of the S&P 500’s return year to date. The rate cut has led to a welcome broadening of the market as small company growth stocks out-performed large company stocks and value stocks outdid growth stocks. Bottom line: more stocks are participating in the market rally.
The U.S. equity market rally has continued through the first three weeks of October. International stocks and bonds have not fared as well. The yield on the 10-year Treasury has increased to 4.2%, driving prices down.
The Fed’s rate cut reflected its confidence that inflation has been tamed, even though it’s not at its 2% target. The unexpected size of the rate cut raised concerns that the Fed foresaw a weakening economy and sought to engineer a “soft landing” thereby forestalling a recession. Economic reports have been generally positive over the last few weeks, now leading to speculation that the Fed may now make fewer than expected rate cuts this year. Inflation is not gone, just accelerating at a slower pace, after having reached a painfully high 9%. Unfortunately, many of the inflated prices we see every day are likely to be permanent.
