Monthly Market Insights – September 2024 / ADV
Greetings Team,
Rate Cut Ripples: How the Fed’s Move Affects Your Finances
The winds of change are blowing, and for the first time in four years, the Federal Reserve has cut interest rates—by a sizable 0.50%. As September closes out, it’s time to break down what this move means for your investments, your home, your savings, and your financial future. In this edition, we’ll examine the Fed's decision in detail and unpack how markets, businesses, and everyday Americans are reacting. We’ll also explore some of the risks that come with lower rates—and why the unemployment rate creeping above 4% could signal a slowing economy.
Market Reaction Roundup
September saw a mixed bag for major indices as they digested the news of the rate cut. Here’s a quick snapshot of how they fared:
- S&P 500: The index jumped after the Fed’s announcement and is now up 21.5% YTD. The index also hit a new all-time high on the news—clearly, the bulls liked what they heard.
- NASDAQ: The tech-heavy index rebounded and is up 23.18% YTD, as investors flock to high-growth tech stocks, drawn by lower rates that make future earnings look even more attractive.
- DOW: The Dow’s up 12.24% YTD after the rate cut, also hitting new all-time highs.
What was the Catalyst?
What led the Fed to cut rates now? With inflation hanging around 2.2%—comfortably near their target—the Fed is trying to cushion the economy from slowing growth by making borrowing cheaper and encouraging spending. Think of it as hitting the gas just as the car starts to slow down. After some initial volatility, the markets seem to like what they see. Growth sectors like tech and consumer discretionary rallied the most—after all, cheaper borrowing makes it easier for companies to finance expansions, R&D, and other growth strategies.
Housing: Boom or Bust?
If you’ve been eyeing that dream house or thinking about refinancing your mortgage, now might be the time. With mortgage rates dropping, the housing market could see renewed strength. Lower monthly payments are music to a buyer’s ears, which could drive up home prices (again), especially in already hot markets. However, this could put even more pressure on first-time buyers, who were already feeling the squeeze of rising prices. If you’re in the construction business, lower rates are a gift, potentially driving new home starts and giving the industry a much-needed boost.
Business Spending: Time to Borrow?
For businesses, it’s like the Fed just put everything on sale. Lower borrowing costs make it easier for companies to invest in growth, especially for small-caps that rely heavily on loans to finance expansion. Expect to see more companies investing in R&D, infrastructure, and acquisitions, as cheaper money often fuels M&A activity. But don’t pop the champagne cork just yet—if economic growth continues to slow down, even cheap borrowing might not be enough to get businesses to open their wallets.
Not-So-Great News for Savers
For those sitting on savings or money market funds, lower rates are a bit like getting socks for Christmas: not exactly what you hoped for. As interest rates fall, so too will returns on safer investments. This is particularly tough for retirees and pre-retirees who rely on them for income. Bond yields, surprisingly, ticked up a bit after the news, with the 10-year Treasury inching up to 3.78% from 3.64% earlier in the month. But as new bonds are issued with lower yields, future returns on fixed-income investments will shrink. It might be time to consider alternatives if you’re looking for higher yields.
Yawning, Sleepy Economy?
While lower rates come with plenty of perks, they’re also a red flag that the Fed is worried about a slowing U.S. economy. The unemployment rate crept above 4% for the first time in years, while GDP growth has slowed down to 3%. Rising joblessness is usually a sign that businesses might be feeling the pinch and pulling back on hiring.
What’s Next?
As we head into Q4, the question on everyone’s mind is whether this rate cut will be enough to keep the economy from stalling—or whether a recession might still be looming. The Fed’s hoping for a soft landing, but economists are split on whether that’s achievable. Investors should brace for more volatility in the months ahead.
In the meantime, lower rates tend to create new opportunities and challenges. Whether it’s refinancing your mortgage or rethinking your bond portfolio, now is the time to review your financial strategy and make adjustments as needed.
As always, we’re here to help guide you through these changing times. Feel free to reach out if you have any questions.
Onward and upward,
-Steven and Daniel
Any opinions are those of Steven Schmitt and Daniel Mar and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained in this commentary does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
