We are excited to share the latest insights from Goldman Sachs Research on the US market and economy.
September started with a US stock market sell-off, triggered by recession fears and the seasonal volatility right before companies report their third quarter earnings. Fears abated after the US economy continued to grow comfortably above trend and the Federal Reserve cuts rates.
Here’s a recap on what happened in the market and economy.
The S&P 500 ended September with a strong 2% gain – its best September since 2013 and a fifth consecutive month of increases. Goldman Sachs Research noted that this is a strong performance considering September typically is a difficult month for stocks, as volatility tends to rise ahead of the third quarter earnings season – a period when companies have to reconcile their full year guidance, and investors may be quick to cut losses close to year-end.
At the start of the month, some investors were concerned that the central bank may be “behind the curve” having waited too long to cut rates to stop the trajectory of a rising unemployment rate.
However, investor sentiment shifted as the S&P 500 continued to climb alongside signs of an accelerating GDP growth, leading some to question if the Fed was priming the pump of an economy that is in no need of priming.
Goldman Sachs Research economists raised their 3Q GDP forecast to 3.2%, as a string of strong economic reports came in with signs of slowing inflation.
On September 18, the FOMC delivered a 50 basis point (bp) cut, which our economists agreed was the right move in light of good inflation news and the risk of further labor market softening.
Subsequently, the labor market performed well above consensus in September, where nonfarm payrolls rose 254,000 in the month. The job numbers were also revised up by 17,000 for August to 159,000 and by 55,000 for July to 144,000. Average hourly earnings and wages also saw increases.
Goldman Sachs Research economists continue to expect 25 bp cuts at the November and December meeting. The choice between a cut of 25 bps or 50 bps was seen as a close call because it’s unclear whether labor demand would prove to be sufficiently strong to absorb strong labor supply and prevent further increases in the unemployment rate.
That said, the September payroll data indicated that a 50 bp cut in November cut is less likely.
Goldman Sachs Research economists lowered their 12-month US recession probability back to the unconditional long-term average of 15%, where it stood before the jump in unemployment rate from 4.054% in June to 4.253% in July.
The most important reason for the change is that the unemployment rate fell to 4.051% in September, marginally below the June level and the threshold that triggered the Sahm rule*.
The revisions to the gross domestic income and savings rate strengthened our economists’ belief that consumer spending can continue to grow at solid rates.
Goldman Sachs Research will be watching third quarter company earnings. Our strategists expect returns to likely remain positive if their baseline economic forecasts materialize.
* The Sahm Rule is an economic indicator used to identify recessions; it uses the change in the 3-month average of the unemployment rate from its low point in the prior 12 months.
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