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It Finally Happened.

John M West III, MBA, CFP®

For the first time in more than four years, the Federal Reserve cut rates at their latest meeting in September by 0.5%. The central bank’s benchmark rate is currently between 4.75% and 5%, down from its highest level in two decades. They indicated that this is the first of many cuts to come. The rate cut signals inflation is trending down towards a level where the Fed is comfortable, although it has not yet reached their target of 2%. As we have discussed throughout the year, lower rates are something we were anticipating and positioning for (See Markets).


In May, the unemployment rate hit 4.0% and has been above that level ever since, after reaching a half-century low of 3.4% in April of 2023. Overall, the labor market is still fairly robust, and we are not seeing significant layoffs. The Fed continues to walk a very fine line between recession and too much inflation as it tries to orchestrate a ‘soft landing’ that many economic pundits reference.


It is important to remember that lower rates will help the entire economy, particularly smaller companies and lower-end consumers who depend heavily on short-term financing (credit cards, auto loans, etc.). It will also help homebuyers who need a mortgage. The rates on a 30-year fixed mortgage have gone from over 7% in early 2024 to nearly 6%. They will continue to go down as the Fed is expected to cut rates throughout the remainder of the year and into 2025. The difficulty is ensuring the Fed doesn’t cut too fast, which can lead to a resurgence in inflation, as I mentioned in the April Commentary.


As a result of the robust economic data and lower interest rates, the pace of the current equity rally is truly something that no one saw coming. The stock market is now 18% higher than the average Wall Street strategist anticipated for 2024. As we mentioned in the January Commentary, Wall Street forecasters are nearly always wrong. As long-term investors, it is crucial to be unemotional while making investment decisions. Throughout the year, the S&P 500 sold off over 5% in March/April and almost 10% in July/August, but these are normal price correction. Volatility is the price you pay as a market participant, but it is much easier to digest as a long-term investor.  


Historically, September is usually the worst month of the year. Going back to 1928, the S&P 500 has declined an average of 1.2%, but we just finished the best September since 2019. As we enter the fourth quarter, October is traditionally a volatile time to be an investor, coupled with a presidential election less than 30 days away. We anticipate additional volatility through the election, which is something that happens every four years. However, November and December have historically been the best months of the year.


In the short term, it is the job of the media to create noise that has very little to do with the actual fundamentals of the economy, which is what drives the markets over the long term. Their job is to get people to view their news. It is important to remember that to be a successful investor, your focus should be on your goals as you save for retirement, enter retirement, or continue to maintain your standard of living throughout retirement. The day-to-day discourse of the media is just to get your attention.

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