Fed Watch – 8/5/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi everyone, my name is Taylor St. Germain with ITR Economics, and welcome to a special edition of Fed Watch. It’s August 5th, 2024. And like many of you, I woke up to some news in the stock market as we saw some broad-based decline across a lot of the financial market metrics.

Now, first, I want you to be reassured that the sky is not falling. We at ITR, along with many of our clients, were prepared for this level of volatility in the stock market. I like to point back to a relationship that will be covered in a blog by our managing director, Jackie Green.

So I certainly would suggest that you go over to our website and check this out. But the chart I like to reference highlights the relationship between corporate profits and the S&P 500. We look at these two metrics on a logarithmic scale, and we can see that for quite some time, the S&P trend has been well above the corporate profit trend.

And history, as you’ll see on that slide in Jackie’s blog, suggests that over time, there is a realignment of these two metrics. And so when we looked at the deviation across these past few years, we knew some volatility in the stock market was coming our way.

Now, especially at this point in the economic cycle where we’re seeing a lot of the data weakening, whether it’s retail sales, the housing market, whether it’s the industrial economy, or even just our expectation of slower GDP growth that characterize the rest of this year, it’s not unusual to see some of that volatility out there in the market.

So we need to consider a number of things. We need to consider the fact that the S&P has been well above corporate profits. We need to consider that we’re approaching the economic low point based on several economic metrics.

And so this volatility is really just not all that surprising to us. Now, we’ve seen the job numbers highlighted, but when we interpret the job numbers, yes, the pace of growth is slowing, but in July, US Private Sector Employment still showed a record high number, 136.3 million people.

And so while that employment trend has been at a record high, yes, the pace of growth has been slowing down. And again, that’s not all that unusual to us. So it’s important you’re interpreting the data and listening to the data rather than listening to what’s going on out there in the media.

So in my very quick summary here, we’ve been preparing our clients and we’ve been prepared for some of this stock market volatility this year. And so this really doesn’t come as a surprise, but I wanna reassure you as it relates to the economy that we still follow our leading indicators and our forecasts for the second half of this year have not changed based on some of the volatility that we’ve seen in the stock market here today.

So stay calm and be patient. Volatility is normal during this part of the cycle. And I want you all to be leading your teams out there with a common cool demeanor. And again, we’ll continue to keep you updated if something were to change, but a little volatility like we’ve seen here today.

I know it’s painful for investors. I don’t wanna downplay that, but it’s not unusual to economists like all of us here at ITR. Again, please go check out Jackie Green’s blog, which will be available on our website with more detail on some of the trends that I highlighted today.

I’ll be back with you all on Friday and we’ll continue to unpack this as we move forward. Hope you enjoyed this edition of FedWatch and we’ll see you on the next one.