Market Note – November 6, 2023

By Hightower Great Lakes on November 6, 2023

Best Week for Equities Since July

The Fed appears to have reached its peak target interest rate, which last week helped equity markets to outperform. Peak interest rates have resulted in a more prevalent risk-on sentiment.

The Fed kept rates steady for the second-consecutive meeting even as labor tightness remains prevalent (3.9% unemployment) and economic expansion is steady – highlighted by +4.9% Q3 GDP and ISM services strength. Despite the strength, the Fed indicates that tightening conditions are having its desired impact on households and businesses – even more reason to stay selective.

In addition to the Fed decision to keep interest rates steady, unit labor costs expanded at their slowest pace since the second quarter of 2021 and productivity reached its fastest pace since the first quarter of 2021. Lower labor costs and better productivity is a goldilocks scenario for future profitability as this combination results in lower inflation.

The 3 P’s: Productivity, Powell (more dovish on monetary policy) and Payrolls (October was softer than expected) are all reasons the markets rallied last week and coupled with the seasonally strong period in the equity markets should lead to a rally into the end of the year.

We continue to like the communication services sector and have been allocating more here. And we also believe the laggards are poised to catch up versus the rest of the market, given attractive valuations and solid fundamentals.   

Chart 1: Increasing Productivity and Decreasing Labor Costs Seeking Balance[1]

Earnings Beating on Inelastic, Long-Term Demand Themes

Companies are still leveraging pricing power to drive revenue; we’re seeing this in earnings reports and in shipping data. UPS (UPS) cut its outlook, citing declining volumes, down -11.5% y/y in the third quarter. For UPS customers, retail reported the biggest volume decline in the third quarter – down across all sectors.

The consumer is not unhealthy, but rather spending continues to be concentrated on services, not goods. Stronger brands with more inelastic consumer demand are less exposed to volume pressure and maintain better pricing power. Molson Coors (TAP) have experienced U.S. volumes expand +3.6% y/y and grew earnings +45% y/y.

Similar brand-loyal companies like McDonald’s (MCD) and Starbucks (SBUX) also reported growing demand in the third quarter. McDonald’s reported same-store sales +8.8% y/y as, “customers continue to seek reasonably priced meals.” Starbucks plans to add global locations while cutting costs, projecting 15-20% annual earnings growth for the next three years.

Another growth theme is occurring within aerospace-related industries– companies like Parker Hannifan (PH) and General Electric (GE) are reporting tremendous growth. Parker Hannifin has doubled its exposure to aerospace over the past eight years and is seeing direct benefits, with the industry driving >30% of its revenues in the most recent quarter.

Onshoring is also driving its earnings growth with 85% of its revenue driven by industrial aftermarket. General Electric has improved the efficiency of its business through divestitures, improved balance sheet and fundamentals.

Overall, 81% of companies in the S&P 500 have reported earnings. Third quarter earnings are on pace to grow +3.7% y/y with the biggest contribution coming from communication services, consumer discretionary and financials.

Bonds Finding Price, Yields Down

U.S. bonds traded relatively flat to begin the week but quickly rallied following the Fed decision to keep the target rate unchanged, lighter than expected Treasury supply announcement, as well as a softer-than-expected ISM reading. Treasuries aggressively bull steepened led by Fridays softer-than-expected October jobs report; U.S. 2-year yield fell 22 bps while U.S. 10- and 30-year ended the week 35 bps and 31 bps lower, respectively.

Following the Fed meeting, the outlook for rate hikes at the January FOMC meeting fell from 35% to begin the week to 15% to end it. High yield spreads tightened this week by 41 bps to +435 bps. Muni yields followed Treasuries lower by 24-37 bps across the curve.

Chart 2: Treasury Bond Yields Have Fallen from Mid-October Peak[2]

The Week Ahead

Earnings – Tuesday: EMR, DHI, FANG, CTRA, O; Wednesday: RL, OXY, DVN, DIS, MGM; Thursday: CTVA, WYNN.

Economics – Friday: Preliminary Michigan Sentiment (November)

Return for Selected Indices^[3]

Click here to read last week’s Market Note (10/30).

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 5, 2023.

[2] Source: FactSet (chart). As of November 5, 2023.

[3] Source: Bloomberg. As of November 5, 2023.