The big economic news of the past couple months is the Federal Reserve’s cutting of its Federal Funds interest rate on two occasions. The first cut in September was half of a percent and more recently a quarter of a percent in early November. Federal Reserve Chairman Powell, in recent comments though, noted that the economy was in good shape making it unlikely that the Fed would cut rates significantly in the near term.
Among the economic bright spots indicated by the Fed Chairman was the continued strong job market. The unemployment rate came in 4.1% in October, unchanged from the September level.
While the Fed’s interest rate cuts signal that inflation is not the concern it was two years ago. Inflation continues to take its time getting to the Fed’s target level of 2%. After 5 months of declines, inflation as measured by the Consumer Price Index, rose 2 tenths of a percent in October to 2.6%. Airline fares, used vehicles, and rental prices saw increases last month while the prices of apparel, gas, and some food items declined.
All in all, lower inflation and the strong job market continue to give consumers the confidence to spend. As a result, the economy grew at a decent 2.8% in the third quarter. Increases in exports and government spending also contributed to growth.
Looking at the market trends over the first six weeks of the fourth quarter, we see that international stocks have lost 7% this quarter largely because the US dollar is up 6%. The US bond market has slipped nearly 3% as the Fed has indicated it is in no rush to cut interest rates. US stocks jumped over 4% immediately after the election but have given up about 2% of that gain in the past week.
A closer look at the markets show the US stock market is up about 2.4% for the quarter and nearly 24% for the year. Large cap stocks have been the primary engine powering the rally and are up over 26% for the year per the Morningstar large cap index. Small stocks though, have been outperforming lately and they are up over 3% for the quarter and 14% for the year according to the Morningstar small cap index. Both developed and emerging market international stocks are down approximately 7% this quarter but they are still in positive territory for the year with developed markets up 5.5% and emerging markets up nearly 8% according to the Morningstar Developed and Emerging Market Indices respectively.
As noted, the prospect that interest rates will not be moving down significantly in the near future has pushed the overall bond market down just under 3%. Short-term bonds have fared a bit better giving up 1.39% this quarter and are still up over 3% for the year. Longer term bonds though are down 6.69% for the quarter and 2.5% for the year as measured by Morningstar core bond index tracking bonds with maturities exceeding 10 years. Overall, government and corporate bonds are both down over 3% this quarter but remain in positive territory for the year.
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