Market Note – October 30, 2023

By Hightower Great Lakes on October 30, 2023

Global Macro Overhangs Versus U.S. Macro Strength

Global conflict and instability, plus elevated interest rates, dragged equity and fixed income markets lower last week, despite central banks pausing further rate hikes, better-than-expected GDP for the third quarter at 4.9% y/y growth and 80% of the S&P 500 companies beating expectations so far.

While it’s been a challenging two-week period with the S&P 500 down -4.8%, it’s important to keep in mind that the year-to-date gains are still up 8.7% and the long term average total returns for the index are up +7.7%.

Q3 earnings are expected to grow +3.5% y/y, up from +0.6% expectations at the end of the quarter. This would be a far cry from the naysayers earlier in the year who predicted an earnings recession at this point in the cycle. So far, 49% of companies in the S&P 500 have reported Q3 earnings and 79% have beaten expectations. 163 companies, or 43%, of the SPX are due to report this week. 

One common theme from companies so far is the caution over macro issues – specifically the geopolitical unrest and the global central bank’s tight monetary policy. We believe this is prudent and are not surprised. 

Despite this, GDP has been strong (and has accelerated throughout 2023), the consumer remains resilient and manufacturing is recovering with PMIs now at 50% (50% and above is expansionary). In addition, new home sales in September came in better than expected, the highest number since February 2022 and near pre-pandemic peak levels. Industrial production and durable orders also continue to expand through September.

Chart 1: Economic Expansion[1]

On the inflation front, core PCE – the Fed’s preferred measure for inflation – was +3.7% y/y in September, continuing its downward trajectory, yet it remains above the Fed’s goal of 2%. While we don’t expect that the Fed will raise rates for the remainder of the year (and it could be finished in total), we do expect that rates will remain high for longer in order to achieve the Fed’s desired lower level of inflation. We will remain data-dependent – as will the Fed on the future for rates. 

There are several central banks that will host policy meetings this week, including the U.S. Federal Reserve Banks, the Bank of Japan, Bank of Brazil and the Bank of England. With the bulk of inflation trending lower, we don’t expect much change from any of these groups. In addition, several job reports in the U.S. will also be reported – JOLTs, initial claims and the nonfarm payroll reports. 

Chart 2: Annual Inflation Falling…[2]

Chart 3: …But Monetary Policy and Rate Environment Continues Tightening[3]

We are finding opportunities across both equity and bond markets as consumers remain healthy, less impacted by higher rates, and savers are benefiting from the elevated yield environment. Companies with strong fundamentals and leaders in respective industries at discounted valuations are showing good entry points for active managers.

Broadening Demand for Bonds

U.S. bond yields fell across the curve last week after stronger-than-expected weekly initial jobless claims, better PMIs and housing data. U.S. 10-year yields ended the week around 4.83%, richer by 12 bps and outperforming the front end as the 2/10-year spread widened by 3 bps on the week.

The bond market is only pricing a 1% chance for a rate hike at this week’s November FOMC meeting, and an 18% chance at the December meeting. Again, we believe the Fed is likely done with raising rates and will remain data-dependent on the future of monetary policy. High yield spreads widened this week by 3 bps to +477 bps. Muni yields sold off by 1-2 bps on the long end of the curve and stayed flat on the short end to finish the week.

The Week Ahead

Earnings – Monday: MCD, VFC; Tuesday: CAT, GEHC, PFE, AMD; Wednesday: CDW, KHC, EL, ABNB, QCOM, MDLZ, ETSY, CVS; Thursday: SBUX, MAR, IR, ZTS, LLY, K, CMI, PH, TAP, COP, SO, AAPL, LYV; Friday: EOG.

Economics – Tuesday: Employment Cost Index (Q3), Consumer Confidence (October); Wednesday: FOMC Meeting (November), JOLTS Job Openings (September), ADP Employment Survey (October), ISM Manufacturing (October); Thursday: Unit Labor Costs and Productivity (Q3); Friday: Nonfarm Payrolls and Unemployment Rate (October), ISM Services (October).

Return for Selected Indices^[4]

Click here to read last week’s Market Note (10/24).

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 October 29, 2023.

[2] Source: FactSet (chart). As of October 29, 2023.

[3] Source: FactSet (chart). As of October 29, 2023.

[4] Source: Bloomberg. As of October 29, 2023.