Trust Investment Management
August ushered in the end of summer and another month of volatility. Equities took a beating at the beginning of the month after the unemployment rate posted its fourth monthly increase and was weaker than expected. This prompted investors to shift their focus away from inflation fears and towards a possible recession. The selloff was short-lived after earnings reports continued to show resiliency and the Fed confirmed that it was time to begin easing. Bonds also rallied on the news as yields declined in anticipation of the first rate cut (bonds and yields are inversely related).
Federal Reserve Chair Jerome Powell delivered a key speech at the annual Jackson Hole Symposium toward the end of August. He remarked that inflation was “on a sustainable path back to 2%” and that the economy would “get back to 2% inflation while maintaining a strong labor market.” These remarks highlighted his optimism that a soft landing may be underway. He also indicated that “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” The CMEGroup’s FedWatch tool target rate probabilities for a 25-bps rate cut at the September Fed Meeting is 100%, and 41% for a 50-bps rate cut. The Federal Reserve policy makers and investors are evidently on the same page.
Real gross domestic product (GDP) increased at an annual rate of 3.0% in the second quarter of 2024, up from 2.8% in the initial estimate and 1.4% in the first quarter. The Atlanta Fed’s GDPNow forecasts that third quarter real GDP growth is 2.1%, and the International Monetary Fund projects that US GDP will be 2.6% this year, and 1.9% for 2025. While economic data were mixed in August a slowdown in economic growth that avoids recession does appear to be unfolding.
The market volatility will likely continue at least until the uncertainty of the election has been resolved. The economy continues to be resilient; the Fed is expected to begin easing, and corporate earnings should improve as inflation and interest rates decline. Investors ought not abandon their investment mix solely due to uncertain markets. As we have seen in August, markets can plunge and quickly recover.
