Author: Eric Cramer, CFP® CFA®
September’s strong jobs report surprised some, but we’ve been telling our clients the economy is fundamentally strong all year. The short version of what we learned with the release of the September jobs report is this: We added 254,000 jobs in September, which is much stronger than the 150,000 consensus forecast.
What does this mean for the economy?
It was widely reported in late August that the BLS had a massive revision downwards in job growth from 3/2023 to 3/2024 (they revise every year). They reduced the amount of job growth by 818,000 jobs, which is one of the largest downward revisions ever. This stoked concerns of a “jobs recession” even though employers are struggling to find workers and other data (such as job openings) confirm a generally strong labor market.
It was less widely reported that in September, real GDP through the end of 2023 was revised up by 1.2%, and 2024 Q2 was revised up .1%. This was mostly due to stronger consumer spending, a metric we have consistently tracked (while also debunking the notion that consumers had run out of money).
It looks like the Fed’s slow pace of lowering rates hasn’t pushed us into a recession. And the Weekly Economic Index (WEI predicts GDP) suggests we aren’t headed for a recession anytime soon.
What does this mean for interest rates?
The strong economy may mean the Fed will take its time lowering interest rates. Current futures pricing shows a 25 bps cut on 11/7 and another 25 bps cut 12/18. Inflation is generally under control, but if energy prices spike due to increased tensions in the Middle East this could affect the data. But it’s safe to expect that we can continue to earn a yield on the short end of the Treasury yield curve that is well above the rate of inflation, and that our Short-Term Tactical strategy will have a useful role to play in client portfolios for the foreseeable future.
At the same time, longer term yields are on the move upwards. If this continues, then we will eventually end up with a so-called “normal” yield curve where investors earn more than the rate of inflation across all terms (even though we haven’t seen much of this for decades). This would be great for investors and businesses, and is what we can expect if the Fed eventually gets to a neutral stance and lets markets be free. It wouldn’t be unreasonable to expect that by the end of 2025 we have the short end of the curve at about 3-3.5%, with the long end of the curve at 4-6%. But there is a lot going on in the world right now that could change the picture between now and then.
What does this mean for the stock market?
As we’ve been saying all year, a strong economy that doesn’t go into a recession suggests it’s a good time to be a stock market investor. A Fed that is lowering rates, and promises to lower them as much as needed to protect the economy, is called the “Fed Put.” We’ve got that right now, and that’s about all a stock market investor could hope for.
But that doesn’t mean there won’t be some companies that aren’t big losers. Individual stock volatility is still quite high, and we think that will continue. Macro events, along with changes in technology that include the emergence of AI as an essential business tool, will re-order the competitive landscape. Many billions of dollars are being invested in innovation all over the world, and especially in the U.S. This isn’t happening in a vacuum—it’s happening with the explicit intention of changing which companies win, and which fall by the wayside. That makes it a good time to be diversified, and for many investors a good time to look at investment strategies like our Concentrated Stock strategy to manage risk.
This quarter’s theme is, “How to Prepare for Market Disruptions.” Listen in as BIP Wealth’s Chief Investment Officer, Eric Cramer, covers what’s going on in the financial markets and how we’re advising our clients.
