Another rate cut after the Presidential
election ?
The S&P 500 index ended October, 1 percent below its level at the end of September. That said, the index’s October average was up 3 percent over September’s.
The September inflation aligned with the market forecasts, approached the Fed’s target inflation rate of 2 percent. Until the last week of October, the markets rallied on the back of the 50 bp rate cut back in September. The rate cut created a demand shift away from bonds toward equities. This rotation in assets fuelled the stock market rally further. The S&P 500 index was hovering above the 5800 mark for most of October till some disappointing tech earnings and the slower GDP growth estimate for 2024 Q3 dampened investor optimism.
As the presidential election takes place on November 6, more volatility in the markets is expected. The US election outcomes historically did not significantly impact the stock markets. However, an election victory by Trump can put more pressure on prices if his pledge to higher tariffs on imports from China materializes. The Fed is independent in executing the monetary policy decisions. Nevertheless, if the cooling in inflation comes to a halt that would endanger further rate cuts. We expect the Fed to go ahead with a 25 bp rate cut in November and in December as things stand.
PMI deteriorates, consumer outlook improves
The Chicago Purchasing Managers’ Index (PMI) fell to 41.6 in October from 46.6 in September. This was below the market anticipation of 46.9. The index’s long-term average from 1967 to 2024 is 54.7. Hence the current value indicates a contraction in business activity.
The Conference Board’s consumer confidence index jumped in October to 108.7 from 99.2 in September (1985=100). The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased to 138 (1985=100) from 123.8 in September. Furthermore, the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—increased to 89.1 (1985=100) from 82.8 last month.
A reading below 80 for the Expectations Index would indicate that consumers are concerned about a recession this year. For a long while the Expectation index hovered below 80. The recent improvement in consumer confidence indices reflects optimism regarding the strength of the economy.
The market consensus of a 25 bp rate cut in November
The Fed Chairman Jerome Powell already indicated in his September speech that two more smaller rate cuts may be coming. In the latest data release in October, The Federal Reserve’s preferred metric — the personal consumption expenditures price index fell to the annualized rate of 2.1 in September from 2.2 in August. This was in line with the market forecasts.
The US economy continued to expand at a resilient pace in the third quarter. US GDP growth for 2024 Q3 was 2.8 percent according to the advance estimate by The Bureau of Economic Analysis. This was slower than the Q2 growth of 3 percent, but not slow enough to raise concerns about a hard landing. The yield spread (the difference between the 10-year and 2-year US Treasury Bond yield) was positive throughout October. This indicates that investors are no longer worried about a hard landing for the US economy. Despite the positive consumer sentiment, we predict both consumer and investment spending to slow down in the coming months. We believe that the Fed will cut the reference interest rate by 25 bp in its November meeting. Another 25 bp rate cut in December looks likely at this point. Loosening in the monetary policy is subject to lags in stimulating real spending.
S&P 500 index remains overvalued
According to Factset Insights from November 1, The forward 12-month P/E ratio for the S&P 500 is 21.3. This P/E ratio is above the 5-year average (19.6) and above the 10-year average (18.1).
Up to now, the US consumers were the main driving force behind the resilient economic growth. However, we expect consumer spending to abate in the coming months. We believe that the US company earnings will be impacted by lower consumer spending. We anticipate the forward 12-month P/E ratio to fall below 21 before the end of 2024.
Our monthly S&P 500 forecast is a model-based fair-value estimate. The possible impact of geopolitical tensions is fed into the model through keyword searches (Google clicks) and the advanced retail sales index. However, these variables perform better in normal times. Our quarterly S&P 500 forecast discusses these issues in more detail.