Market Insights September 6, 2024

Data released this week confirmed the labor force in the United States is cooling. The unemployment rate is 4.2%.  The U.S. economy created slightly fewer jobs than expected in August, clearing the way for the Federal Reserve to lower interest rates later this month. August private payrolls rose by 99,000, the smallest amount since 2021 and well below estimates. This was the worst August for layoffs since 2009. Nonfarm payrolls expanded by 142,000 during the month, nearly 20,000 fewer than the consensus forecast.

This is enough data for the Federal Reserve to start cutting rates. In the normal pace of rate cuts, most would expect the Fed to reduce rates by .25%. However, the odds of a .50% rate cut in September has been rising and now stands at  41%. In our opinion, a .50% rate cut could spark deeper fears about the economy and the possibility of a more widespread recession. At the very least, such a move would certainly bring about increased volatility.  Forvis Mazars Chief Economist George Lagaris said “The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency and, you know, that could be a self-fulfilling prophecy,”

The weakening labor force is sparking selling in the market this week. As of this writing the S&P is 4.1% lower, the Nasdaq is down 5.6%, and the Dow Jones Industrial Average has fallen 2.8%.  Gold has been steady this week, trading near its all-time high and the yield curve normalized briefly Wednesday, as the 10-year note rose above the 2-year. We should see the yield curve revert to normalization following the September rate cut,

If you have been following our connection and market updates, you know we have been warning of excessive volatility and possible corrective selling for quite a while. We have a higher-than-normal allocation in cash as we continue to monitor the market, seeking opportunities in undervalued equities.  Money markets are yielding 5%, providing a nice haven while we wait. Additionally, we have adjusted our covered call overlays, shortening the expiration dates and lowering the strike prices in an effort to provide additional downside protection and cash flow. I would expect the volatility to continue through 2024 as the economy cools and the presidential election draws near.  (Be sure to check out Were Talking Money’s 2024 Election Voter’s Guide Podcast, https://www.youtube.com/watch?v=nbPbnooK08w)

https://www.businessinsider.com/fed-rate-cuts-jerome-powell-job-market-slowdown-labor-department-2024-9