MONTHLY MARKET MUSINGS

September 2024

Heading Into The Fall Season

The market is now in agreement that the U.S. Federal Reserve (Fed) will kick off its rate cutting cycle at the upcoming September meeting. Recently, at the annual economic conference in Jackson Hole, Wyoming, U.S. Fed Chair, Jerome Powell, gave the market the greenlight for the expected upcoming interest rate cut as he announced that the "the time has come" to adjust policy[1]. He also noted how he is confident that U.S. inflation is on a sustainable path back towards the central bank's 2% target rate and that the Fed does not want to see more cooling in the labour market. He stated in his speech that the U.S. economy continues to grow at a solid pace and that the upside risks to inflation have diminished but that the downside risks to employment have increased. Essentially, the U.S. Fed is faced with a bit of a balancing act. They need to keep the economy growing at a reasonable pace but can't allow it to grow too fast because they need to keep inflation trending in the right direction. At the same time, the economy can't slow down too much and put pressure on the labour market as this could push the economy towards a recession. While the market no longer has any doubt that the rate cutting cycle is about to begin, the size of the cuts and the total number of cuts for the rest of 2024 is still uncertain and will likely remain data-dependent for the remainder of the year. The upcoming U.S. unemployment data on September 6th should provide investors with some direction as it could reveal whether the market gets a 0.25% rate cut or a larger 0.50% cut in September.

Q2 earnings season is nearly all done and despite some initial concerns about the results, it proved to be quite good overall. 477 of the companies in the S&P 500 Index (S&P) have reported. Of those, 80.04% have topped consensus estimates on earnings with the average earnings beat coming in 5.20% higher than consensus forecasts. U.S. earnings growth is up an average of about 9.39% year-over-year in the most recent quarter across the companies in the S&P. For the S&P/TSX Composite Index (TSX), 211 out of 226 companies have reported and 59.42% have beaten consensus earnings estimates.[2] All in all, companies continue to display strong growth and cost discipline for the most part and this should continue to support further strength in the equity markets. The rotation amongst the sectors that we experienced in July has spread capital away from overconcentrated areas of the market, namely the growth-oriented sectors, and this could potentially help create a longer-lasting more sustainable upward path for the markets. This diversification of equity market returns amongst the sectors results in a reduction of risk and should be seen as a positive from a risk/reward standpoint even though it may result in slightly more modest returns.

What To Expect This September?

With September historically being the worse month of the year[3] and a significant number of market-moving events on the horizon, it safe to say that volatility will remain high. That said, it is hard to say for certain that there will be excessive weakness during the month. It is possible that, perhaps, investors will buy equities leading into the rate cut and take profits shortly after the announcement on September 18th. This could result in some pressure on the markets before the focus re-centers and shifts towards the U.S. election and the further rate cuts in 2025. It is always difficult to accurately predict how any given month may pan out and this is the key reason why it is important to view investing in terms of playing the long game over time rather than getting too caught up in the minutia of the short-term horizon. Overall, it is worth noting that corporate earnings are still quite strong, the economy is continuing to grow, and the Fed seems to have done relatively well regarding tempering inflation. The recession that many voiced concerns about last year seems to have been avoided for the foreseeable future.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com