Happy Friday, September 20th!
Investors applaud the first rate cut in 4 years. The SEC approves half cent trading. Gen Z’s financial feelings are influenced by social media. Signs of fall -- the pumpkin spiced latte is back!
#1 – Weekly Market Recap
Stocks set all-time highs as the Federal Reserve cuts rates 0.50% -- the first rate cut in over 4 years.
Through yesterday’s close, the technology heavy Nasdaq was up +1.7%, but remains 4% below its all-time high. The S&P 500 and Dow Jones set new highs on Thursday and are up +1.6% and +1.5% for the week.
Early morning trading this morning signals that investors may be digesting some of yesterday’s outsized gains heading into the weekend.
According to Peter Callahan at Goldman Sachs, Nasdaq trading was particularly heavy yesterday with 12.3 billion shares traded – about 10% above the 2024 average. It may have gone undetected by some investors, but semiconductor stocks traded higher in the last 9 trading sessions. Over this span, semis are up approximately +12%, more than the previous 172 trading sessions combined.
With the Federal Reserve meeting in the review mirror, investors are now turning their attention to corporate earnings and the Presidential election.
Early morning trading was down as FedEx (FDX) disappointed investors by missing profit estimates and cautioned its business would slow. Stocks also fell in Europe as Mercedes-Benz Group cut its forecast due to slowing sales in China. Gold reached another all-time high.
#2 – Two Steps Forward
The Federal Reserve cut its target interest rate by 0.5% on Wednesday to 4.75% - 5%, down from the 5.5% that remained in place for more than a year.
This week’s interest rate cut is the first since March 2020. As a reminder, the Federal Reserve dramatically increased interest rates from 0% to 5.5% after the pandemic in what was the most aggressive monetary tightening campaign in 50 years.
In last week’s Friday 5, we wrote that the continued easing of inflation and softening labor markets opened the door for the Federal Reserve to cut interest rates at this week’s meeting.
We posited that the question for the Federal Reserve was how big of a rate cut would they make, not whether a rate cut would occur. That question was answered Wednesday as the Federal Reserve cut rates by 0.50% to a new policy range of 4.75%-5.0%.
Investors pushed stock prices down as Chairman Powell indicated in his press conference following the meeting that investors should not expect a series of “jumbo” cuts at the two remaining meetings in 2024.
The Fed’s internal forecasting, known as the “dot plots,” released after the meeting, implies only 0.50% of rate cuts over the two remaining meetings in 2024.
Source: FOMC
At DSG Capital Advisors, we believe the Federal Reserve should cut rates more than 0.50% indicated in the dot plots in 2024.
One of the tools that we use to gauge current financial conditions is “real” interest rates. Real rates are simply nominal rates less inflation. Real interest rates help measure how tight or loose monetary policy is by eliminating expected inflation.
The chart below shows how real interest rates on 10-Year Treasury yields have changed as Federal Reserve rate policy has changed. During the pandemic, the Federal Reserve slashed interest rates to 0% and real interest rates fell to -1%. We classify this as extremely loose monetary policy.
But as the Federal Reserve hiked interest rates from 0% to 5.5% after the pandemic, real interest rates spiked to over 2.5%...which created extremely tight monetary policy. Real interest rates have been north of 2% for much of the last year, slowing the economy and softening the labor market.
At DSG Capital Advisors, we believe the Federal Reserve was “forced” to cut interest rates by 0.50% this week to lower real interest rates that stayed too elevated for too long.
For the same reason, we anticipate that the Federal Reserve should cut interest rates more than 0.50% at the two remaining meetings this year. To navigate a desired “soft landing” for the US economy, we would encourage Powell and the Federal Reserve to cut interest rates by an additional 1% -- moving real interest rates firmly into “neutral” territory.
Source: New York Fed
Source: Federal Reserve
#3 – Half Cent Stocks
Apparently, a penny is now worth too much!
Next fall, many stocks will be affected by the Securities and Exchange Commission’s (SEC) vote to allow stock prices to be quoted in half-cent increments. The adjustment aims to narrow the bid-ask spread for highly liquid stocks that currently trade with a 1-cent spread.
The change is expected to impact the pricing of many major stocks, including most of those in the S&P 500, as well as some highly liquid exchange-traded funds. The new rule is expected to go into effect in November 2025.
This change, part of a broader overhaul initiated by SEC Chair Gary Gensler after the 2021 GameStop frenzy, aims to reduce trading costs for investors by narrowing the bid-ask spread—the difference between buying and selling prices. The new rule is aimed at helping investors save money when trading.
Prior to the current cent-based pricing, stocks were quoted in 1/8th increment fractions. In 2001, the SEC implemented cent-based pricing.
For many high-volume traded stocks like Ford (F) or Walgreens Boots Alliance (WBA), a 1 cent bid-ask spread is too wide. Under the new rules, stocks will be quoted in half-cent increments, providing narrower spreads. The change could impact nearly 1,800 stocks according to the SEC.
While this decision has garnered praise from groups like the Managed Funds Association and IEX Group, it has faced criticism from stock exchanges. Nasdaq expressed concerns that the rule fails to account for the complexities of the market.
When implemented, the SEC’s change to ½ cent pricing will mark another step in modernizing trading infrastructure, benefiting investors by offering lower trading costs.
Source: WSJ
#4 – Gen Z Money Dysmorphia
With a seemingly infinite amount of information available on-line, young adults have better access to information about money than their parents. Unfortunately, many continue to feel stress and anxiety about their financial futures.
Amanda Clayman, a financial therapist defines money dysmorphia as “a negative and unrealistic perception of one’s financial wellness or financial position.”
Money dysmorphia goes beyond wanting to contribute more to a retirement plan or pay off credit card debt. Clayman describes it as “pervasive, worry, vigilance –- like an internalized feeling of unsafety with money,” even when there are no pressing financial problems.
In a survey conducted in December by Credit Karma, 43% of Gen Z respondents and 41% of millennial respondents said they experienced money dysmorphia.
People in their 20s may be facing big life transitions such as saving for a wedding, a house or starting a family and not have a clear idea of how much money is needed. The larger and more abstract a financial goal is, the easier it is for young adults to feel like they are not close to achieving it.
Another cause of stress about money is that younger people have a tendency to compare themselves to their peers on social media, often creating a warped sense of reasonable and achievable financial goals. Being bombarded by images of fun, travel, fancy restaurants and elaborate homes can perpetuate undue worry and doubt about one’s own finances.
Clayman suggests the most productive strategy for people feeling anxious about money is to seek financial advice and make a budget – one that’s realistic and shame-free.
Source: Business Insider
#5 – It's PSL Time
Each fall, coffee drinkers anxiously await the arrival of the Pumpkin Spiced Latte, which has become synonymous with fall. According to market media company Nielson, Starbucks sells about 20 million pumpkin-spiced lattes per year!
Peter Dukes, director of espresso Americas for Starbucks' director of espresso Americas, was the product manager who led the development of Pumpkin Spice Latte. Early in 2003, a small group gathered in the “Liquid Lab” at Starbucks headquarters in Seattle. The lab was a cross between a chef’s kitchen and a scientist’s playground—with industrial refrigerators, espresso equipment, and an eclectic mix of potential ingredients and flavors.
The team had previously developed the recipes for holiday favorites Eggnog Latte and Peppermint Mocha and were looking for a new beverage to add to the fall espresso lineup. They settled on a recipe that used pumpkin spice sauce with cinnamon, clove and nutmeg – handcrafted with espresso and steamed milk – and topped off with whipped cream and a dash of pumpkin pie topping.
That fall, the Pumpkin Spice Latte was rolled out across the company’s U.S. stores, beginning a new fall tradition. The beverage built a loyal fan base and has been enjoyed more than 600 million times since.
“Pumpkin Spice Latte has become more than just a beverage,” Dukes said. “It has become a harbinger of the season.”
Source: Starbucks
Source: Pymnts
Have a great weekend!
Denver and the DSG Capital Advisors Team