Weekly Investment Update (09/13/2024)

The S&P 500 stabilized this week following its largest weekly pullback (-4.2%) since the Silicon Valley Bank failure in 2023. Concurrently, interest rates continued to trend lower, with the 10-year Treasury rate touching levels last seen in June of 2023, 3.66% as of this writing. All eyes look toward the Federal Reserve meeting on September 18, where we expect monetary policy to ease for the first time since the pandemic (more detail below). Key to the market’s continued advance is positive economic data that reassures investors that the Fed is not behind the curve. Although a somewhat hotter-than-expected inflation report this week may push the Fed toward a 25-basis-point cut, we believe the cost of providing additional downside protection with a 50-basis-point cut is low relative to the upside risks to inflation, which are muted. In fact, the bond market is once again pricing in a greater than 50% chance of a 50-basis-point cut next week. Labor market data will be critical to continued market stability. Although we are seeing softness, layoffs remain low, the prime-age employment-to-population ratio is at cycle highs, and initial unemployment claims are stable.

August CPI Report Maintains Focus on the Labor Market Ahead of FOMC Meeting Next Week

What is happening: The August CPI report showed a modest uptick in core inflation, while headline inflation sustained its downward trend. Although core CPI increased 0.3% month-over-month, above consensus expectations for 0.2%, it remained unchanged at 3.2% on a 12-month basis. Headline inflation fell from 2.9% to 2.5% year-over-year, its lowest level since February 2021. The above-consensus increase in core data was largely attributable to shelter prices remaining elevated. Shelter, the largest component within service prices, increased 0.5% in August, defying expectations of a slowdown. August was the second straight month of shelter price acceleration this year, preventing further easing of the core inflation levels. However, leading indicators for shelter prices, such as rents, are gradually decelerating and point to further slowing over the coming months. Please refer to our publication “U.S. Services: Navigating Inflation’s Last Mile” for more detailed information.

Why it matters: Despite a few services categories remaining sticky, inflation continues to trend back toward the Fed’s 2% target. The 3-month annualized rates for both core and headline sit at 2.1% and 1.1%, respectively. The August CPI report leaves the Fed ample room to begin its easing cycle, and preserves the debate about whether 25 or 50 basis points is appropriate.

Given the Fed’s data dependent approach, the pace and magnitude of rate cuts is likely to depend largely on evolving economic data, especially pertaining to the labor market. While labor market data continues to signal that it is softening but not materially declining, Fed Chair Powell has highlighted that any further weakness in the labor market would be unwelcome. For the Fed to achieve a soft-landing scenario, balancing a healthy loosening of the labor market with the right policy stance will be critical. Therefore, as monetary policy is currently restrictive, we believe it is prudent for the Fed to lower its policy rate in order to minimize the risk of economic growth weakening too much.

The Benefits of Staying Invested Despite a Seasonally Weak Month

What is happening: Historically, September has been the weakest month of the year for stock market performance. From 1928 to 2023, the S&P 500 has averaged a loss of 1.2% during September, finishing positively only 44% of the time. In contrast, the average return across all months since 1928 is 0.64%.

As with all seasonal patterns, performance varies from year to year. In September 2010, the S&P 500 gained 8.8%, the best month of that year, and the September month returns of 2012, 2013, 2017, and 2019 were all positive. When equity markets have been particularly weak in September, a strong rebound in October often has followed. Notably, monthly returns for November and December are above the long-term monthly averages. The period from October to January is typically a seasonally strong period for the market, with average returns of 4% since 1928.

One explanation for the so-called September Effect is that some investors sell equities to participate in the large number of bond offerings that tend to be issued after the summer months. The first two weeks of September are typically the busiest weeks of the year for bond issuance. Last week was no exception, with 59 borrowers in the U.S. issuing $80 billion of debt, marking the fifth-highest week of issuance on record, and this week saw an additional $35 billion of issuance.

The U.S. election this year adds an additional dynamic to seasonal effects. While an increase in equity and bond market volatility can be expected as we approach election day, historically, once the outcome is known, markets typically revert to focusing on longer term economic fundamentals and policies of the new administration, and in turn, volatility returns to longer term averages.

Why it matters: While historical patterns and seasonal trends can provide some guidance for the direction of markets, relying solely on such a simplistic approach has not proven to be a successful strategy. In the short term, equity markets are influenced by many factors beyond seasonal patterns, such as economic indicators, geopolitical events, and company-specific developments. Making investment decisions based solely on a seasonal strategy overlooks crucial market dynamics and can lead to missed appreciation and unnecessary risks. Moreover, historical data has shown that timing the markets may often lead to losses.

We believe the most appropriate strategy for reaching long-term investment goals is to stay invested while adjusting portfolio positioning based on a thorough understanding of underlying economic and financial factors. Bessemer maintains an overweight position to equities relative to respective benchmarks and expects forthcoming interest rate cuts to help support earnings growth and the overall level of the S&P 500 in the short to medium term.