Market Note – September 25, 2023

By Hightower Great Lakes on September 25, 2023

Higher for Longer Means Economic Strength

As credit yields steadily reflect a “higher for longer” monetary policy, economic data reflects low unemployment and consumer strength. The Atlanta Fed GDPNow Model is still projecting +4.9% q/q GDP acceleration.

The latest initial unemployment claims reported 201,000 – a continuation downward and far from recessionary levels, and the 4-week moving average now stands at a new cycle low at 216,000. Jobs strength, high yielding savings and wage growth is bullish for the U.S. consumer. It has rarely paid to bet against the consumer.

Chart 1: Declining Unemployment Data, Despite Fed Tightening[1]

Chart 2: Money Market Funds Still Climbing With Rising Yields[2]

We continue to monitor the impact from worker strikes. Upward pressure on inflation includes higher wages, higher energy-related costs and the continued strength in services. Wages and energy-related costs may also place pressure on margins, if not reflected in higher prices.

Similarly, we expect the rising U.S. dollar will be cited by companies as having an impact on corporate margins for orders abroad. That being said, we believe earnings have bottomed and the better demand will be a powerful offset to any margin pressure, especially as companies continue to rightsize their businesses and increase prices.

Chart 3: U.S. Dollar Strengthening as U.S. Rates Rise and U.S. Economy Expands[3]

Chart 4: Crude Oil Prices Rising, Pressuring Energy-Related Inflation Costs[4]

Chart 5: Higher Employment Costs Stay High, Even With Tougher Annual Comps[5]

September Overcast

It’s been a seasonally weak September for equity markets as is typically the case for this month. In fact, the S&P 500 has contracted in each of the past four September months.

The S&P 500 ten-year average is -1.5% in September; one of only two months (the other being December) that are averaging negative returns. Many variables impact monthly seasonality, and we should not put much weight into historical trends when it comes to seasonality. But since we are on the topic, October has been one of the best months, historically, for the S&P 500.

A looming government shutdown, widespread labor strikes and rising oil prices continue to be challenges for overall equity markets globally. Poor performance across hedge funds this year is resulting in performance chasing, as many managers caught short equities during the strong first half. As long-term investors, we don’t want to be part of that crowd, and we have taken profits in certain positions, opting to find new value – especially in the energy and technology sectors.

In addition to the uncertainties over Fed policy, the labor strikes and higher gas prices, there is now the potential for a government shutdown. Former majority leader, Eric Cantor, expects a shutdown, with the bigger question being just how long it will be closed.[6]

Whether the government shuts down or stays funded in an eleventh-hour deal, the expected overhang will be another excuse for market volatility. Shutdown talks are sure to receive a lot of attention this week with four bills needing to pass the House of Representatives by October 1.

Fixed Income: High Yield Outperforming Quality

High yield credit has been outperforming the U.S. aggregate index for much of 2023. Persistently higher yields since March, plus tightening credit spreads, have resulted in high yield bonds materially outperforming the broader corporate bond market. Investment grade credit, particularly longer-term bonds, tends to be more interest-rate sensitive than shorter-term high yield bonds.

Chart 6: U.S. High Yield Bond Index Outperforming U.S. Aggregate Bond Index[7]

With many portfolios chasing duration, either expecting rate cuts or simply underweighting equities, bond portfolios have provided very little performance support this year unless they hold short-duration and/or opportunistic credit. We do anticipate higher quality becoming more favorable heading into 2024 as corporate credit spreads have approached historically tight levels.

Chart 7: Tightening Credit Spreads Support High Yield Outperformance[8]

The 10-year has climbed about 40 bps in September, heading for a fifth-straight month of increases. Market participants and the Fed continue to diverge in the rate path through year-end, with a Fed dot plot showing policymakers penciling in one more hike while market participants have priced in a 50% chance. High yield spreads are just off of year-to-date lows. Municipal yields followed treasuries higher across the curve on the week, rising 13-21 bps.

Focus on Portfolio Positioning

Very few things have been working in the third quarter. Managers and analysts recognized last week that broad-based bond markets are not providing ballast in a portfolio. Instead of mitigating risk, they have been adding risk. The energy industry is the only part of the equity market not following this trend; instead, it is providing strong diversification this quarter. The magnificent seven technology companies, driven by momentum, topped out in July.

Chart 8: Energy Outperforming Momentum[9]

We have experienced huge sentiment shifts among market pundits – either a recession or a boom – and the truth is in between. Sentiment swings don’t support momentum, and we are looking towards quality businesses with strong balance sheets and cash flows that have lagged, reflected in valuations.

While capital markets are off the low point, and banks are experiencing better net interest income, the heavy exposure to (lower) bond valuations and increasing allocation to loan reserves is keeping financial stocks cheap. Semiconductor companies have commented on bloated inventories, and we are eagerly awaiting an update from many of those companies. We want to see where the industry is in regards to PC, memory and AI end-market demand.

The Week Ahead

Earnings – Tuesday: COST, CTAS; Wednesday: MU; Thursday: NKE.

Economics – Monday: Dallas Fed Index (September); Tuesday: Building Permits and New Home Sales (August), Consumer Confidence (September), Richmond Fed Index (September); Wednesday: Durable Orders (August); Thursday: Final GDP (Q2), Kansas City Fed Manufacturing (September); Friday: PCE Deflator (August), Personal Income (August), Chicago PMI (September), Michigan Sentiment (September).

Return for Selected Indices^[10]

Click here to read last week’s Market Note (9/18).

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.

---

[1] Source: FactSet (chart). As of September 24, 2023.

[2] Source: FactSet (chart). As of September 24, 2023.

[3] Source: FactSet (chart). As of September 24, 2023.

[4] Source: FactSet (chart). As of September 24, 2023.

[5] Source: FactSet (chart). As of September 24, 2023.

[6] Source: Politico. As of September 11, 2023.

[7] Source: FactSet (chart). As of September 24, 2023.

[8] Source: FactSet (chart). As of September 24, 2023.

[9] Source: FactSet (chart). As of September 24, 2023.

[10] Source: Bloomberg. As of September 24, 2023.