Last quarter we wrote that the economy was sound on a solid growth path. Now despite recent volatility, we believe the markets too will continue to grow, that volatility will subside and growth will be modest. The sector rotation out of the high P/E growth tech stocks and into the smaller stocks in the broad market is ongoing, however, tech is, and always will provide higher growth ‘over time’. Inflation is slowly approaching the two percent target and interest rates are slowly falling, but as described below may remain at these levels for some time. Absent a credit crunch on the horizon, we no longer see a return to the historically low levels of the past decade.
In this environment, the Federal Reserve’s activities in monetary policy will become less consequential and are rapidly losing the attention of market analysts. The Fed noted recently that since inflation is sufficiently close to targets it can now focus on sustaining employment that had been seen as softening. The Fed then aggressively reduced interest rates by a half point in part in anticipation of disruptions from Hurricane Helene. Unbeknownst to them, the softness in employment was temporary apparently due to strikes. Labor is picking up again as consumer spending again shows no signs of meaningfully abating. This leaves the Fed in the enviable position of now focusing on simply adjusting interest rates as necessary by reacting to new data. Given the stable and strong growth of the economy, interest rates may remain at these levels for some time. The upside is that analysts focus and the media’s constant obsession over the Fed’s next move will subside and will move on to other economic indicators. As we’ve noted many times before, the stock market itself has proven to be the most effective and accurate predictor of the economy, but, this is of little help in predicting the markets themselves.
The scenario of a soft landing of the overall economy seems to be on track. The housing shortage continues. Commodities prices are falling across the board. Inflation is low. Income, productivity and wages are growing while employment remains high and stable. The oft mentioned federal infrastructure fiscal stimulus as a multi-year ongoing process continues to sustain and support economic growth. We expect the markets to respond accordingly with ongoing modest growth.
As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
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