The 3^rd quarter of 2024 was a positive one for most areas of the US stock market. The Dow and the S&P both hit new highs.  The Magnificent 7 stocks took a breather while the broader market participated in the upward market move.  The 3^rd quarter saw the Federal Reserve pivot from rate hikes to its first rate cut.  At their September meeting Fed members voted to cut the Fed fund rate from 5.25% to 4.75%.  The final revision to the 2^nd quarter GDP was pegged at 3%.  The job report for September was a surprising 250 thousand jobs added.  And inflation continued to cool through the quarter ending September with an annual inflation rate of 2.4%, the lowest since February 2021.

The S&P bull market is entering its 3^rd year.  Unemployment is 4.1%.  Inflation is cooling to the FED targeted 2%.  Markets typically do well after a presidential election.  And the FED is bringing down interest rates. 

So, why is the US market doing so well?  Outside of the US there is a full-blown global recession.  That is forcing funds out of other markets into the stronger US dollar.  The FED rate cuts are pushing funds out of money market accounts into equities.  US companies are continuing to buy back their own stocks by the handfuls.  The mandated participation in retirement accounts is feeding cash into the market on a bi-monthly basis.  FOMO draws in investors who’ve decided the market can only go up. 

The Federal Reserve has been promising rate cuts since the November 2023 meeting.  The market started 2024 expecting 6 rate cuts over the course of the year. Then FED chairman Jerome Powell all but promised the first-rate cut following the July meeting.  So, a .25% cut was all but a certainty.  But the .50% cut was an indication the FED was seeing warning flags that the economy was in trouble.  Each section of the US sends an internal report back to the FED which is written into the FED’s Beige Book.  Since November of 2023 the Beige Book has signaled recession.  Those warning signs are growing stronger.

The September job number showed over 250,000 new jobs.  Sounds good until you look under the hood. The biggest job gains were in government, health care services and hospitality.  Factory, construction and white-collar jobs continued to decline.  There was an increase in the number of workers with 1, 2 or 3 part-time jobs.  The number of hours in the aggregate full time work week continued to decline.  While the government has found the need to hire, private sector job opportunities aren’t as abundant.  First come weak hiring and then layoffs.

While investors in the stock market are feeling pretty good about market returns, non-investors are seeing their situation in a less positive light.  Consumer credit card delinquencies and car loan defaults are sending up warning flares.  Two of the three months in the 3^rd quarter saw credit card usage go flat.  When consumers stop spending prices start going down.  That is what the FED was aiming for when it bumped up rates.  But the FED decision to cut rates signaled concern that inflation would drop below the 2% target.  The FED did not cut the interest rate because it wanted to.  Rate cuts precede recessions.  The FED cut was a signal to other central banks to cut rates as well.  The global recession is heating up.  China is an export driven economy that is hurting deeply because the world is not buying their products.  Chinese banks are in a downward spiral which could ignite a worldwide problem, similar to the spread of US financial problems to the world in the Great Financial Crisis.

The size of the rate cuts showed the FED was looking in the Beige book and becoming concerned that disinflation might move into deflation. 

When the FED announced the .50% decision, there was concern from some that the cut would bring back inflation.  If inflation returns it will be driven by something like supply chain disruption or excessive government spending, not FED interest rates.  There is an average 16-month lag time before the impact of a rate hike or cut is felt.  The impact of rate hikes is still rolling through the economy.  The September rate cut will have a late 2025 or early 2026 impact.  Expect the FED to cut rates by .25% at both the November and December meetings.

The potential trouble spots are the usual hotspots.  The Middle East, the South China Sea, Eastern Europe and, the global banking system.  Commercial real estate is the shoe waiting to drop in the US.

The Oak Springs portfolio remains defensive, overweighted to long duration US government bonds, gold, utilities and a collection of dividend paying stocks.  While the S&P is having its best year since the turn of the century, gold and utilities are outperforming it.