Market Note – November 13, 2023

By Hightower Great Lakes on November 13, 2023

Equity Consolidation as Bond Yields Fall

As bond prices increase, and yields fall, equity markets are experiencing a bullish, risk-on sentiment that has driven this recent rally. Earlier this month, the Fed spurred this dynamic by indicating no more rate hikes this year and auctioned a smaller amount of long-term debt than expected.

Chart 1: Bond Yields Fall, Equity Market Returns Positive in November[1]

The S&P fell -6% and subsequently rallied 7% since mid-October. The dovish Fed comments during its November FOMC meeting helped spur the equity rally, supported by inflation slowdown, steady labor conditions and strong economic growth.

We continue to monitor labor data closely – the consumer represents 70% of the U.S. economy. October nonfarm payrolls came in weaker than expected, though jobless claims remain tight, and we experienced a boost to productivity. We are paying attention to this week’s October Building Permits report, which will indicate the housing industry’s forecast for sustained demand in light of higher interest rates.

Today’s 3.9% unemployment rate and 212,500 weekly initial unemployment claims both reflect a very tight labor market. Pre-pandemic, the tightest unemployment was 3.5% in September 2019, and the slowest pace of weekly initial claims was 204,000, also in September 2019. This labor market is still extremely tight and stable, relative to more than 50 years of history.

The economy continues to be much stronger than expected, and that leads directly into corporate profits. The historically sustainable U.S. GDP growth target tends to be +2% q/q. U.S. GDP has maintained above this pace for five consecutive quarters. The Atlanta Fed GDP model currently projects +2.1% for Q4.

Chart 2: More than a Year After the Fed’s Policy Shift, GDP Staying Above Trend[2]

Inflation is slowing. We will receive important November inflationary indicators this week: CPI and PPI. We expect slowing inflation and better productivity to contribute to better growth. The Fed has been less hawkish as a result. We think the Fed is done hiking, and we don’t expect rate cuts anytime soon.

Positive Third Quarter Earnings Growth

At the beginning of this year, many were anticipating an earnings recession in the third and fourth quarters. With 92% of S&P 500 companies having reported third quarter earnings, 82% are beating expectations and the aggregate EPS growth is +2.5% y/y. Earnings are reaccelerating, while management’s guidance remains broadly conservative.

Chart 3: Trailing Twelve-Month Earnings Reverse Trend, Turn Positive[3]

Aerospace and machinery are major themes within industrials, with strong backlog due to inelastic demand for efficiency and new technology to replace aging fleets. Onshoring is another long-term theme, supported by infrastructure fiscal policy.

Selectivity is important in capturing these themes across industrial and manufacturing sectors. The consumer discretionary sector is reporting the highest annual EPS growth, led by leisure, hotel and retail industries. Strong brands maintain pricing power, while experiencing lower costs due to inflationary trends.

On the other side, freight and logistics have experienced challenges due to lower volumes. And while oil and gas producers’ profitability has slowed, given extremely tough annual comps, energy services remain robust. Materials companies with the right end-markets are experiencing better earnings growth (e.g., medical technology, housing, and industrial), compared to those exposed to agriculture and freight, for example.

There is plenty of value to find within the S&P 500. Looking ahead, we are seeking management teams that can improve operating margins for retailers that have lower inflationary costs due to efficient supply chains and better inventory conditions. We do expect management to remain conservative on guidance.

Bond Prices Rally, Then Friday, Moody’s Cut its Outlook

Since the end of October, the 10-year yield has fallen 29 bps, compared to the 2-year yield remaining flat. The 2/10-year spread nearly un-inverted at the end of October, due to a rising 10-year, and the yield term spread remains tighter than it’s been for most of the past year.

U.S. bonds began the week rallying on the long end of the curve by as much as 15 bps before yields surged after demand at 30-year treasury auction was anemic. 2-year yields increased more than 10 bps Wednesday after Powell said the central bank isn’t fully confident that it has tightened enough to return inflation to 2%. Market participants are pricing in a 14.3% chance of a hike in December’s meeting, up 5% from the week before.

Moody’s reaffirmed U.S. Credit as AAA, but changed its outlook to negative, citing risks from deficits and political polarization. High yield spreads tightened this week by 7 bps to +428 bps. Muni yields rallied by 8-12 bps across the curve.

The Week Ahead

Earnings – Tuesday: HD; Wednesday: TGT, TJX, PANW, CSCO; Thursday: WMT.

Economics – Tuesday: CPI (October); Wednesday: PPI (October), Retail Sales (October); Wednesday: U.S.-China Summit; Thursday: Industrial and Manufacturing Production (October), Philadelphia Fed Index (November), KC Fed Manufacturing Index (November); Friday: Housing Starts and Building Permits (October).  

Return for Selected Indices^[4]

Click here to read last week’s Market Note (11/6).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of November 12, 2023.

[2] Source: FactSet (chart). As of November 12, 2023.

[3] Source: FactSet (chart). As of November 12, 2023.

[4] Source: Bloomberg. As of November 12, 2023.g