The markets got good news this week regarding what had been one of the stronger arguments for an economic slowdown - the labor market. A September jobs report that came in well above expectations and an unemployment rate that ticked lower for the second straight month may be helping investors feel like fears are getting overblown. Retail sales numbers have been pretty resilient. GDP growth has been firmly positive. With the Fed beginning to lower rates and additional government stimulus likely on the way in the 4th quarter, it’s easier to see how there’s a path for higher stock prices heading into the end of 2024. I’m still convinced that the deterioration we’re seeing in the credit markets along with the endless cycle of more and more debt is a very real risk that could ultimately create the “credit event”. In fairness, however, I do need to acknowledge that the U.S. economy has remained pretty healthy and resilient.
The jobs report has shifted expectations for the Fed, which probably brings the markets in line with where the pace of policy change should be. The markets are now pricing in quarter-point cuts in November and December, largely eliminating the possibility of another half-point cut by year-end. If these conditions hold for the next month, there’s little reason for the Fed to make another aggressive move. In fact, another 50 basis point cut with the labor market trending positively could actually spook the markets and make it appear as if the Fed is hiding something. Right now, a series of more modest 25 basis point cuts would serve to help normalize conditions based on the latest data without getting too aggressive. I’m still concerned that falling rates while the economy is still in good shape runs the risk of another round of inflation.
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