Recent Monthly Update from City National Rochdale

City National Rochdale

September 26, 2024

As we move into fall and back-to-school season is in full swing, we continue looking at the latest thoughts on markets and the economy. Here is the most recent commentary from City National Rochdale.

The Fed Funds Rate easing cycle has begun. The data-dependent Federal Reserve has seen enough evidence to justify lowering short-term rates by 50 basis points, and much will be discussed on forecasting the pace and timing of further reductions. We are focusing less on the exact timing of the cuts and more on the underlying health of the US economy and the state of the US consumer. We continue to see resilience in consumer spending and corporate profitability, with geopolitics remaining the key risk in our forecast.

Within our investment portfolios, we continue to have a positive outlook for equities as this easing cycle should be a tailwind for future growth. High quality companies with reliable earnings and profits remain a key driver of portfolio performance, and as always, staying diversified should dampen any late summer/early fall volatility that may arrive. Fixed income investments should also benefit from a reduction in interest rates, and we have already seen significant price recovery from 2022 lows.

CURRENT EVENTS

After much anticipation this month, the Federal Reserve reduced its Federal Funds Rate decisively, by 50 basis points, to a range of 4.75% to 5%. The move is the first rate cut in over four years and is a shift by the Fed from battling inflation to focusing on aiding employment growth. Further projections from the committee suggest an additional 50 basis points reduction this year and 100 basis points reduction in 2025, though historically, the Statement of Economic Projections (SEP) from the Fed has not always been an accurate forecast of what they actually do with interest rate policy.

Election Day is less than two months away and the outcome is a toss-up. The Presidency, Senate, and House of Representatives all appear too close to call as campaigns make a final push toward November. While the races may increase short term volatility in the financial markets, the important consideration here is that economic fundamentals, corporate earnings, and interest rate trends tend to have a greater impact on market returns than government control. Our focus remains on how the political landscape shapes potential policy changes on tariffs, taxes, and Treasuries as we head into 2025.

The Securities and Exchange Commission approved rule changes that will allow stock exchanges to price many stocks and ETFs in half-penny increments. The change is designed to improve trading liquidity and competition for orders. The update is set to go into effect in November 2025.

ECONOMIC OUTLOOK

Corporate earnings momentum continues to be strong. Second quarter earnings grew 11.3% (year-over-year), which was the strongest since 2021. Moreover, the breadth of earnings estimates continues to show improvements across sectors. We continue to expect corporate profit growth finishing the year between 9%-12% and additional growth in 2025 between 8%-12%.

The labor market remains strong but continues to show signs of cooling. August payrolls increased by 142,000, weaker than expectations for a 165,000 gain. While revisions to previous data were adjusted down, it is unlikely to have a material impact on overall economic growth. The unemployment rate fell to a healthy 4.2%, and wage gains outpaced inflation for the month. Importantly, we see no major signs of recession on the horizon.

Inflation continued to decelerate in August as the Consumer Price Index fell to 2.5% year-over-year. The monthly report was a mixed bag as shelter (housing) remained stubbornly high while food and energy prices were tepid. Moderating growth and inflation trending towards the Federal Reserve’s 2% target both continue to support the expectation that the Fed will continue lowering interest rates in the coming quarters.

FINANCIAL MARKETS

September has been volatile for equities, but thus far modestly positive. We are expecting this volatility and increased trading volume to increase as market participants conclude summer vacations and re-position for potential election outcomes. We are not surprised by the relative underperformance of International Equities (both developed and emerging) versus the US so far in 2024, as we continue to see geopolitical conflict persist. Couple that with bleaker international economic outlooks, and you have a recipe for increased risk with lower total return.

As short-term interest rates decline, investors will no longer be able to find risk-free returns above 5%. Fixed income investments, which benefit from falling yields, should be viewed as increasingly attractive for investors with cash on the sidelines.