Market Note – October 1, 2024

By Hightower Great Lakes on October 1, 2024

Awaiting the Fed

Economic data last week continued to support a soft landing, a view we have held for quite some time. Simply put, we are in a soft landing. There is no debate. The 2Q final GDP revision came in at 3% led by strong personal consumption expenditure growth which was up 2.8%.

The third quarter is now running at 3.1% growth according to the Atlanta Fed GDPNow tracker. The labor market is shifting to a more balanced situation with the 4-week moving average of weekly initial jobless claims still well below recessionary levels at 222K vs 350K-375K during recessions.

The September Non-Farm Payroll report will be introduced this Friday, and we are watching the revisions as well as wage growth (average hourly earnings).   

On the inflation front, August’s Personal Consumption Expenditure (PCE) inflation reading came in at 2.2% y/y. PCE is the Fed’s preferred inflation gauge, and August’s data came in below expectations and is now just 20 bps off the Fed’s 2% goal.

Over the past four months, PCE and the consumer price index (CPI) have been running at an annualized growth rate of just 1.05% and 0.87% respectively.

Jerome Powell discussed that the Fed has shifted its focus from inflation (they have won on getting it down) to the labor market, where the committee “invites no further cooling”.

Financial markets trended higher last week with the S&P 500 hitting its 41^st all-time high this year. The S&P 500 closed Friday up 0.62% on the week – the third straight week of gains.

The news of the week was China’s stimulus package through lowering interest rates and providing liquidity across the economy. It was the most aggressive stimulus package since the pandemic: 50 bp reduction on existing mortgages, cut the minimum downpayment requirement by 15% for all homes, and a reserve requirement ratio (RRR) decline of 50 bps which freed up 1 trillion yuan ($142 billion) of new lending, among many other efforts.[1]

The Heng Seng index had its best week in 26 years on the news, rising 13%.

We believe more stimulus is likely and that it is a “whatever it takes” moment from the Chinese government. Growth has been stagnant following the Covid reopening and is nowhere near their stated goal of 5% GDP growth for 2024.

The stimulus should help to reflate their economy, and we believe we are in the early innings for their equity markets. Since 2023, $30 billion of flows have left China, its equity market trades at 10x earnings, and portfolio managers have reduced their Emerging Markets exposure from 35% to 21%.

We vastly prefer owning U.S. multinational companies that have exposure to the Chinese economy versus pure China exposure. U.S. companies with exposure have much better transparency and less political risk. 

Chart 1: Inflation is Back Near the Fed’s 2% Target[2]

Q3 Comes to a Close

Third quarter earnings season is around the corner. Markets are looking for 4.6% y/y earnings growth for the S&P 500 which would mark the fifth straight quarter of growth for the index.

Eight sectors are expected to report positive earnings growth, with three in the double digits: Information Technology, Health Care, and Communication Services. On the downside, three sectors are expected to report flat to negative earnings growth, with energy expected to experience a double-digit decline.

Overall, we maintain a positive economic outlook led by solid GDP growth, lower inflation, and lower interest rates, which all should lead to 8-10% earnings growth this year.

Fixed Income

U.S. Treasury yields inside of three years declined last week while the rest of the curve was higher, steepening the 2s10s to +19bps. Investment grade spreads remained unchanged at +128bps while high yield spreads tightened 4bps to +357bps.

U.S. credit ratings remained steady last week as the main rating agencies issued 35 upgrades and 35 downgrades. Within those changes, Utilities had the most upgrades.

Municipal bond yields rose by 6bps over the week while yields in the belly of the curve finished slightly lower and the long end remained unchanged. Last week’s new issue volume totaled $17.3 billion, the most in more than two and a half years and almost double the one-year weekly average. With one trading day left in the quarter, the broad Muni indices are all poised to post their best quarterly performances since 4Q23.

The Week Ahead

Earnings – Monday: CCL; Tuesday: MKC, NKE, PAYX; Wednesday: CAG, LW; Thursday: STZ.

Economics – Monday: Fed Chair Powell and Fed Governor Bowman speak; Tuesday: Markit PMI Manufacturing, Construction Spending, ISM Manufacturing, JOLTS Job Openings; Wednesday: Fed Governor Bowman speaks; Thursday: Continuing Jobless Claims, Initial Jobless Claims, Markit PMI Services, Durable Orders, Factory Orders, ISM Services; Friday: Hourly Earnings, Average Workweek, Nonfarm Payrolls, Unemployment Rate.

Return for Selected Indices^[3]

Click here to read last week’s Market Note (9/20).

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: Reuters. As of September 24, 2024.

[2] Source: FactSet. As of September 30, 2024.

[3] Source: Bloomberg. As of September 30, 2024.