Q3 - September 2024
Here we are again with another “everything rally”, which is amplifying the wealth effect and frankly keeping this economy moving. This latest lift to the markets has been helped by a Fed who choose to cut interest rates by ½%, the first in more than four years. This provided a boost to the non-Mag 7 within the S&P 500, small cap stocks gained 10% in July, and the bond market is back in positive territory after a down 1st half of the year². Jobs growth has cooled, manufacturing is in a contraction, but the consumption driven US economy trudges along. How? Well, a big support or strength within the economy is household net wealth which is up to 785% of Americans’ disposable personal income, the highest point in two years, and up from 700% five years ago. Net wealth includes your homes, investment portfolio and other assets less liabilities. Another way of saying it is that American’s net worth is almost eight times greater than our annual income, and importantly equities make up the biggest share of the pie EVER. For some individuals that is an understatement but for others that percentage might be less than 100%, so it’s an aggregate of the whole. 50 years ago, that number was around 450%. As the ratio or percentage implies, net wealth has been rising faster than income. The concentration of this wealth is worth noting as almost 80% is held by 20% of the US population³. We just lived through the most inflationary period of time for America in 50 years, so while a large share of our population has struggled financially with the higher cost of everything, those with the assets do not have much reason for complaining, and without their purchasing power we all might be in worse shape. Let’s hope it sticks around, but there are two sides to this as home affordability is a problem and those “without” are in many ways left out.
We were surprised to see the Fed cut interest rates by 50 bps, not because it makes a big difference, but historically, a first cut of that size has occurred when something bad was occurring in the economy. Absent a clear crisis we thought the Fed would avoid raising the concern. Inflation rates have slowed and if you subscribe to the “lagged effect of monetary policy”, the economy and inflation will not reaccelerate tomorrow because the Fed lowered rates today. No, the Fed’s move is designed to slow the pace of descent down the road. We will see. The most interesting topic during the Fed’s press conference after the September rate announcement was towards the end of the event, when a Bloomberg columnist asked Powell about housing. Powell has humbly referenced the Fed’s lack of control or power before, but he again had to acknowledge that the affordability of housing is a bigger problem. Getting aggregate asset prices back in line with income levels while not destroying the wealth effect – a tough ask.
Tyler Pullen, CFA
Portfolio Manager
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¹ S&P Global, US banks' construction loan delinquencies hit highest level in at least 3 years, 5/8/24
² WSJ, It’s Home-Building Season, but No One Is Buying Lumber, Dezember, 6/30/24
³ WSJ, No Nvidia in your Portfolio? You’re Just Toast, Grant, 7/1/24