Third Quarter 2024 Financial Review
Ruben’s Commentary on the Market
Third Quarter 2024 Review
The financial markets and investors were finally rewarded for their patience and steadfast belief in the American Economy. The governors of the Federal Reserve Bank voted at the September meeting to begin lowering interest rates. They determined that the economy had finally begun to slow and has moved closer to the 2% inflation rate deemed to be reasonable in maintaining a healthy economy. There was speculation by the financial analyst community as to whether to begin the lowering rates by a quarter percentage point or to act more aggressively and lower the rates by one half of a percentage point. The Fed governors apparently felt that a more aggressive first move would confirm that their having kept rates higher was doing the job to slow the economy. 12 of the 13 governors voted to drop rates by .5% with only one voting to lower rates by only .25%.
We have experienced much economic volatility over the past three years. The inflation rate zoomed to 8.3% in 2022 during the midst of the Covid Pandemic, dropping to 2.4% this September. The lowering of rates was precipitated by the Fed holding rates at higher levels until the economy began to slow. Roughly speaking, the Fed put the squeeze on the economy, holding rates higher making money more expensive to borrow for both businesses and the individual consumer. The Federal Reserve Bank’s favorite inflation indicator is the Personal Consumption Expenditures (PCE) price index. The index (which excludes food and energy) measures the prices that we pay for goods and services. The PCE has come down to 2.7% from 4.2% last year. This is closer to the Fed’s target. The Fed will be watching this number closely going forward because even though the (PCE) has slowed, we have had very strong employment numbers in September, which boils down to more people working and more people spending money keeping prices elevated.
Two sticky sectors that have resisted price reductions so far are housing and food prices. As interest rates decline mortgage rates will follow the path downward. Unfortunately, there is currently a shortage of homes. I anticipate that the home builder sector will ramp up housing starts and thrive in the forthcoming lower interest rate environment. Food prices may remain higher for a while because the higher employment rate has produced more workers with purchasing power.
The economy is holding steady and the recent earnings reports from the third quarter have shown that retail sales remain strong. Banks and financial institutions are taking a leadership role as the economy preps for lower interest rates. Technology stocks also continue to drive the markets higher. Their earnings are driven by the large demand for semiconductor chips. Manufacturers are racing to keep up with that demand. A few simple examples of heavy chip users are televisions, telephones, manufacturing equipment, medical technology, electronic games and automobiles. It amazes me that the typical car uses between 1400 and 1500 semiconductor chips with some of the more sophisticated vehicles using as many as 3000. In the future demand will only continue to grow as technology advances.
Many ask how will the continued challenges from Russia’s incursion into Ukraine, the decades long troubles in the middle east and the weather challenges that we have seen here recently in the United States affect our country and most importantly our financial well-being? In the short term we have witnessed a rise in oil prices as many of the oil supply lines have been limited because of sanctions on Russia, Venezuela and Iran among others. However, demand appears to be decreasing as many global economies begin to slow. The United States is a strong resilient country whose economy leads the world. Some global strategists call it “a global economic oasis.” Our economy is not perfect, however the consistency of our economy through ups and downs reflects the strength of our people. We are determined people and driven to continue to lead the world in innovation.
How will the presidential elections affect our stock markets? The banter and the continuing attacks levied by the candidates on one another have little effect, if any, on earnings produced by companies. So far, 20 percent of the S&P 500 companies have posted earnings for the third quarter with almost 80% exceeding earnings, as estimated by the analyst community. The four major U.S. banks have already declared earnings for the third quarter with each exceeding earning projections. That is a clear sign of a healthy economy. Stock market success is driven by earnings not by politicians. The markets typically tend to shake off election years. In a PIMCO study dating back to 1955 and continuing to 2023, the markets have demonstrated (regardless of party) market gains for both first term presidents and second term presidents.
I am confident that our market success will continue. We are poised for continued positive earnings. The Federal Reserve bank, by acknowledging that inflation is headed down, has begun the process of lowering interest rates. This action will make money cheaper to borrow and lower the cost of manufacturing and eventually bring down the cost of goods and services. With a steady workforce (4.1% unemployment) this should provide a continued demand for those goods and services, thus feeding the earnings pipeline.
Our investments have done well throughout 2024. We have entered the fourth quarter, which is consistently one of the strongest stock market quarters of the year, with a great head of steam to end the year. I believe that when we look back at the year 2024, having experienced foreign and domestic turmoil, we will feel comfortable with our success.
I wish you all a wonderful Holiday Season. Enjoy your family and friends. Please don’t hesitate to reach out if there are any questions that you may have.
Best regards,
Ruben E. Guerra
Guerra Investment Advisors
