Week of November 4th, 2024

Key Points for the Week

• November is historically one of the best months of the year for the stock market.
• The economy added only 12,000 jobs in October. This was significantly less than what was predicted.
• Aggregate income growth remains strong, rising at a 6.4% annualized pace over the last three months.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

For the American economy, a soft landing happens when the Federal Reserve raises interest rates to cool the economy and push inflation lower—and achieves its goal without causing a recession and significantly higher unemployment. This is not easy to accomplish.

“Historically, soft landings have been tough to pull off…Keeping unemployment and inflation low while at the same time having robust growth is difficult. Threading that needle has proven to be quite elusive.”

↳Source cited by Aly J. Yale, The Wall Street Journal

Solid economic growth, low unemployment, rising wages, and falling inflation have one Federal Reserve official and several economists declaring that the American economy has achieved this rare event—a soft-landing, reported Bryan Mena of CNN.

So, exactly how well is the U.S. doing?

“The extent to which America has outperformed other countries since the start of the COVID-19 pandemic is breathtaking. Its real GDP has expanded by more than 10 [percent], nearly three times as much as the euro area. Among the G20 group, which includes both rich countries and emerging markets, America is the only one where output is above pre-pandemic expectations, according to the International Monetary Fund.”

↳Simon Rabinovitch, The Economist

Last week, “with an election and Federal Reserve meeting still to come, stocks faltered under the weight of the uncertainty.” ↳Teresa Rivas, Barron’s

Major U.S. stock indices finished the week lower. Uncertainty about the direction of future government spending and its possible effect on Federal Reserve policy caused some turmoil in bond markets, too, reported Paul R. LaMonica of Barron’s. Yields on longer maturities of U.S. Treasuries moved higher over the week, while yields on shorter maturities moved lower.

This Week in the Markets

November is historically a very strong month for stocks. The last time the S&P 500 fell more than 1% in November was in 2008, and it has been higher 11 of the past 12 years. Not to be outdone, it is the best month of the year since 1950, in the past decade, and in election years, while it ranks as the second-best month the past 20 years (only July is better).

It is worth noting that the five-month win streak is over and it should not be too surprising that stocks fell in October, as this month is indeed the worst month of the year in an election year.

Another reason to remain bullish is November, December, and January are historically the best consecutive three months of the year, up 4.4% on average.

Historically, we are entering the best six months of the year, where the S&P 500 has gained 7.1% on average and been higher 77% of the time.

What happens when the ‘Sell in May’ period is strong? After all, this time around stocks have gained more than 15% during this usually weak six-month stretch, one of the best gains over this period ever. We found 11 other times the S&P 500 gained double digits from May through October and the next six months … it did even better, gaining 10 times and climbing 13.2% on average, well above the 7.1% average seen in all years.

October Payroll

October payrolls were a disappointment, with job growth clocking in at just 12,000. However, this should not be a big surprise because we knew Hurricanes Milton and Helene would weigh on the numbers. The Bureau of Labor Statistics (BLS) said that Hurricane Milton hit right during their data collection week, and the establishment survey responses were well below average (though it is hard to quantify what the weather impact exactly was). Beyond hurricanes, strikes at Boeing and in parts of the auto industry in Michigan/Ohio also negatively hit payrolls, to the tune of about 41,000 jobs. Ultimately, all of these are likely to be temporary and will possibly reverse in November.

Payrolls for prior months were revised lower. September payrolls were revised down by 31,000 to +223,000 jobs, and August was revised down by 81,000 to +78,000 (the first sub-100,000 monthly payroll number since December 2020). A month (or two, or three) of sub-100,000 job growth is par for the course even during strong labor markets. In 2019, monthly job growth averaged 166,000 but we saw four months with 100,000 or fewer jobs created. Right now, the three-month average of July-September job growth is 148,000 (ignoring October). That is not bad, but that is clearly a slowdown from what we saw in the first quarter of 2024, when monthly job growth averaged 267,000.

At the same time, there was good news elsewhere in the report, with data points that were less impacted by the hurricanes.

• The unemployment rate was unchanged at 4.1%, which is encouraging.
• The prime-age employment-population ratio fell from 80.9% to 80.6%, but even this matches the highest we saw in the last cycle (and there could be some hurricane effects here).
• Wage growth picked up to an annualized pace of 4.5%, and that is the same pace even if you take a 3-month average. (The 2017-2019 pace was 3.1%.)
• Weekly hours worked was also unchanged and is currently running at the pre-pandemic level. (It is higher for non-managerial employees.)

What really matters for an economy that depends on consumer spending is aggregate income growth, i.e. income growth across all workers in the economy. That is the sum of employment growth, wage growth, and the change in hours worked. Despite the negative revisions to August and September payrolls, and the huge hit from hurricanes and strikes to October payrolls, aggregate income growth is running at a 6.4% annualized pace over the past three months. That is well above the 4.1% pace we saw pre-pandemic.

There is Reason to Be Optimistic

The big picture is that the labor market has cooled off a lot relative to where we were at the start of the year, but it is still in a healthy place right now. There is a lot more going on below the surface.

Between mid-2023 and mid-2024, we saw the unemployment rate move higher even as payroll growth remained strong. This was because more people came back into the labor force to look for jobs. However, the dynamics are shifting as the labor market matures. There may be fewer people “coming off the sidelines,” which is going to result in lower monthly job growth, perhaps close to 150,000 – 170,000 a month. Yet if layoffs remain relatively low (as they have), we should not see the unemployment rate move higher. Going forward, aggregate income growth is more likely to be powered by strong wage growth, rather than employment growth that averages over 200,000 a month.

This also means there are risks to the outlook. It may seem strange to bring up risks when we just saw Q3 2024 GDP growth rise at an annualized pace of 2.8%. Consumer spending was strong, powered by both income growth and a pullback in the savings rate. If the savings rate starts to rise again, we could see spending pull back from its torrid pace. Business investment was also strong in Q3, though half of that was from aircraft spending, and that is unlikely to repeat in the next quarter or two. Residential investment (housing) dragged on GDP growth for the second quarter in a row. We are not optimistic for a turnaround anytime soon, especially with mortgage rates moving back to near 7%.

All this to say, it would not be surprising to see GDP growth revert to the 2-2.5% range (or even lower) in Q4 2024 and Q1 2025. More than the equity market, we have seen this in the bond market. Since the Federal Reserve’s (Fed) meeting on September 18, the 2-year US Treasury yield has risen 0.56%-points to 4.16% and 10-year US Treasury yield has risen 0.64%-points to 4.28% (driving mortgage rates higher). This is counterintuitive, since the Fed went big with a 0.50%-point cut at their September meeting and projected more cuts into 2024 and 2025. However, to a first approximation, yields are essentially expected Fed policy rates in the future. If economic growth is expected to be strong, there’s presumably less reason for the Fed to cut rates by a lot.

It seems like investors may be optimistic about growth and projecting the strong recent economic numbers out into the future, but those numbers are backward looking. Looking ahead, there are risks. For one thing, housing looks like it may struggle due to elevated mortgage rates. There are even risks for the labor market. When job growth is averaging 150,000 – 170,000 a month, it does not take much of a shock to send it below 100,000. That becomes a problem. This is why the Fed may continue easing interest rates to mitigate downside risks to the labor market and revive interest-rate sensitive sectors like housing.

Keep in mind that the Fed was easing rates even in 2019, amidst a solid job market.

It is about risk reduction at this point, and the good news is that they can continue easing rates because inflation has normalized. That is thanks to lower gas prices and easing housing inflation.

Headline inflation is up 2.1% year over year as of September, which is the slowest pace since February 2021 (as measured by the Fed’s preferred metric, the Personal Consumption Expenditures Index). That should give the Fed plenty of scope to continue to normalize rates.

Perception vs. Reality

The human brain is complex and powerful. It runs on about 20 watts of power and brains need to be recharged, just like your cell phone does, according to Northwestern Medicine.

It is interesting to note that brains are not objective. They catalogue our experiences, beliefs, and emotions and then interpret what is happening around us. As a result, our reality on any given day is affected by our personal physical abilities, energy levels, feelings, social identities, and more, reported Jill Suttie in Greater Good Magazine.

For example, studies have found that hills look steeper when people are:

• Tired.
• Wearing backpacks.
• Thinking of people they dislike.

In contrast, hills look less steep when people feel energetic or think of a supportive friend.

An August survey from the National Federation of Independent Business, a small-business advocacy group, reinforced the idea that there is a gap between economic perception and economic reality. The survey found that small business owners were quite optimistic about the financial state of their businesses, reasonably optimistic about the state of their local economies, and pessimistic about the state of the U.S. economy.

When survey participants were asked when the United States might experience another recession, 52 percent said the U.S. economy was in a recession right now. A recession is a downturn in economic activity that lasts for a significant period. Economic data show the U.S. economy, as measured by gross domestic product (the value of all goods and services produced in the U.S.), has been growing since late 2020.

The answers were interesting because most businesses—small and large—experience declines in sales and profitability when the national economy is doing poorly or in a recession.

“People are upbeat about what they see directly but pessimistic about what they glean indirectly through media (and social media).”

↳Rabinovitch, The Economist

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

How To Avoid Tax Scams

Below is a link to a video provided by the IRS to help avoid tax scams:

https://www.youtube.com/@irsvideos

If you have any questions, please contact us.

The Social Security Lock

The Social Security Lock (also known as the "Social Security Number (SSN) Lock") is a feature provided by the Social Security Administration (SSA) that allows individuals to block electronic and automated access to their Social Security records. This is primarily a security measure to prevent unauthorized or fraudulent use of your Social Security Number (SSN), particularly to help prevent identity theft.

How the Social Security Lock Works:

• Blocking Access: When you activate the lock on your SSN, it prevents others (and yourself) from accessing your Social Security records through electronic means, such as through automated phone systems or online services.
• Protecting Your Information: This feature is especially helpful if you are concerned about identity theft or if your SSN has been compromised. It reduces the likelihood that someone can fraudulently open accounts, apply for credit, or access benefits using your SSN.
• Unlocking for Legitimate Use: If you need to use your SSN for legitimate reasons, such as applying for benefits, you can temporarily unlock or remove the SSN Lock by contacting the SSA. You can also re-lock it after your transaction is completed. __ How to Enable or Disable the Social Security Lock:__
• Visit the SSA Website: Go to the Social Security Administration’s website and sign into your mySocialSecurity account (you will need to create an account if you do not have one).
• Enable SSN Lock: Look for the option to lock your SSN and follow the prompts to activate the lock.
• Disable SSN Lock: If you need to unlock your SSN for any reason, you can do so temporarily by following the same process.

Important Notes:

• The SSN Lock applies to automated access to your records. It does not stop manual processing of benefits or in-person requests for information.
• The lock is a good idea if you are not currently using your SSN often, but you should keep in mind that it requires proactive management, especially if you need to access benefits or financial services in the future.

This tool provides an extra layer of protection but does not replace the need for vigilance regarding the use of your Social Security Number in other situations, like sharing it with third parties or financial institutions.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

November 6, 1869: Rutgers Beats Princeton in First College Football Game

On November 6, 1869, Rutgers beat Princeton, 6-4, in the first college football game. The game, played with a soccer ball before roughly 100 fans in New Brunswick, New Jersey, resembled rugby instead of football as we know it today.

In 1866, Princeton walloped Rutgers, 40-2, in baseball. Wanting to even the score, Rutgers challenged Princeton to a three-game football series for 1869. Each school had 25 players. Every score counted as a "game," and the contest was supposed to end when the teams combined for 10 "games." Rutgers finished with six games to Princeton's four.

Princeton won the rematch, but the expected third game never was played. Both teams finished the 1869 season with a 1-1 record. 

In 2019, Rutgers theater students reenacted the first game to commemorate college football's sesquicentennial.

Weekly Focus

Creditors have better memories than debtors.

Ben Franklin, American Polymath and Inventor

Think before you speak, read before you think

Fran Lebowitz, American Author and Orator