From the Desk of GFC - Mid-December 2024
Global Financial Consultants Pte Ltd (GFC)
Unbiased Advice and customised financial solutions for Expats, Permanent-Residents and Singaporeans.
What happened over the last month?
?After the “volatile” month we reported in mid-November, markets have continued in the same vein, reflecting the mixed economic picture which has been emerging of post-election business confidence, tempered by high household debt and sticky inflation.??
November jobs figures in the US bounced back after the anomalously low (hurricane-impacted) print in October, Nonfarm payrolls rising by 227,000 (above the 200,000 expected).? Unemployment in the US rose slightly to 4.2% and November CPI (Consumer Price Index) increased from 2.6% in October to 2.7% year-on-year, continuing, at least, under 3% for the fifth consecutive month.
As a result of all the above:
compared with my mid-November update, when looked at in USD terms.? For clarity, I’ve included on the chart below:
over the same 1-month period.
Global Equity Markets, EUR, SGD, GBP – 3-month view (in USD terms)
What’s on the horizon?
1. Inflation, Central Bank policy & Trump?
Besides the November CPI figure (rising 0.1% from October and 2.7% year-on-year, in line with expectations), Core CPI (excluding volatile food and energy) rose by 0.3% over the month, to an annual rate of 3.3%.? The futures market is now pricing in a 93% probability of a further 0.25% cut when the Fed meets later this week, according to the CME Fed Watch tool, resulting in a 425-450 target range (vs. today’s 450-475 range) by year-end.?
In other “Central Bank” news, the European Central Bank cut rates by another 0.25% in reaction to slowing growth in Germany and France, who are, not coincidentally, experiencing considerable political turmoil.? As Trump appoints key members of his new cabinet whilst tweeting threats of tariffs, it may seem a little odd that the US equity and bond markets are as calm as they are (somewhere near a 2-year low), but this seems to be a vote of confidence for the US economy’s prospects, relative to the rest of the developed world.??
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On that point, South Korea sent investors a reminder of why index-provider MSCI classifies it as an “Emerging Market” (whereas FTSE Russell considers it “Developed”) with its sudden imposition of martial law in recent weeks (albeit short-lived).? With Developed Europe in trouble (including its post-Brexit neighbour, the UK, whose economy unexpectedly contracted in October) and Developed Asia suffering as China struggles with its domestic challenges and the prospect of increasing tariffs), America continues to be the “least bad” place to invest, albeit with its risk of heightened valuations and extended debt levels.
2. Elevated Equity Valuations vs. Corporate Earnings?
Referring to the gauges above we see that US equities have moved back from “greed” to “neutral” sentiment territory and remain “overvalued” vs. historical averages.?
That said,? we must re-reiterate the point that equities can stay expensive (or cheap) for long periods of time and therefore that valuations are not a useful signal for market timing.??
Q3 earnings season is now complete, with FactSet reporting in this infographic a fifth straight quarter of year-over-year earnings growth by the S&P 500 for Q3 of 5.8%, with 75% of companies reporting a positive earnings surprise.??
Amongst those companies was NVIDIA, and we would note that the level of their earnings “surprise” has been reducing significantly over the last five quarters, beating by 30%, 19%, 12%, 9% and, most recently, “only” 5%; a pretty clear downward trend.? With NVDIA representing such a large portion of the US equity market (as beautifully visualised here) and trading at a 45.5 forward P/E multiple (vs. the global equity average of around 17.8) its next earnings report will be one to watch.
Conclusion
2024 has been quite a year, and it’s fair to say that US equity has been the place to be.? We have the prospect of a political changing of the guard from January 20th, as Trump’s administration takes the reins and we would lean towards optimism on this prospect given the extensive business experience of many of his cabinet picks vs. what we see in so many other developed economies (e.g. with the new UK Government’s recent “tax-to-grow” budget having seemingly misfired, based on feedback from businesses). We are also hopeful regarding Trump’s stated aim to quickly end the conflicts we’ve seen drag on, over the last couple of years.? Almost regardless of the terms, we don’t see how this can be a bad thing.?
It will, also, very soon be Christmas. We therefore wish you a very merry Christmas and a healthy and happy New Year!