From the Desk of GFC - Mid-November 2024
Global Financial Consultants Pte Ltd (GFC)
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What happened over the last month?
After the “risk-on” month we reported in mid-October, markets turned volatile again, bolstered by a further (0.25%) cut in interest rates by the Federal Reserve but with globally mixed performance following the US election result.??
October jobs figures in the US were much lower than expected, Nonfarm payrolls rose by only 12,000 (well below the 100,000 expected, although probably attributable to the hurricane season, in which case the figure should be revised up next month). Unemployment in the US held steady at 4.1% providing further relief from the (much predicted) recession narrative based on the "Sahm Rule" triggering three months ago.? October CPI (Consumer Price Index) disappointed again; up 2.6% year-on-year, but did, at least, continue under 3% for the fourth consecutive month.
As a result of all the above:
compared with my mid-October 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?
Besides the October CPI figure (rising 0.2% from September and 2.6% year-on-year, above expectations), Core CPI (excluding volatile food and energy components) rose by 0.3% over the month, to an annual rate of 3.3%.??
Following on from the Fed’s “jumbo” 0.5% rate cut in its September meeting, a more modest 0.25% cut was announced last week. The futures market is now pricing in a 59% probability of a further 0.25% cut when the Fed meets in December, 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 Bank of England opted to copy the Fed, also cutting rates by 0.25%, as did the European Central Bank.? The US equity market’s positive response to Donald Trump’s victory in the US election rather overshadowed any response to the Fed’s rate cut, which came a few days later, with the S&P 500 experiencing its best post-election trading day ever and its best one-day performance since November 2022, albeit with mixed US sector performance (e.g. renewable energy and shipping falling, as did ex-US regions) based on anticipated Trump policies on energy and tariffs.? USD continued to strengthen vs. other major currencies, in spite of the 0.25% rate cut, as both a vote of confidence in the US economy vs. other developed markets, and reflecting USD’s role as a “safe haven” reserve currency in light of ongoing geopolitical tensions in the Middle East.
2. Elevated Equity Valuations vs. Corporate Earning
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Referring to the gauges below we see that US equities have moved back from “extreme greed” to “greed” sentiment territory and remain “overvalued” vs. historical averages.??
US Market - Valuation & Sentiment gauges (click images to view detail)
That said, we will 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 nearly complete, with FactSet reporting in their Earnings Insight a fifth straight quarter of year-over-year earnings growth by the S&P 500 for Q3 of 5.3%, with 75% of companies reporting a positive earnings surprise.??
The report notes that forward P/E for the S&P 500 (see graph below) is at its highest level (around 22.2 as at the report date, Nov 7th) in more than 3 years, which is one of the inputs to the “overvalued” metric above.
Conclusion
In the last month, Goldman Sachs suggested that the S&P 500 would likely return only 3% p.a. nominal (i.e. 1% in “real” terms, above inflation) over the next decade, citing the concentration risk of a small number of stocks being responsible for much of the index’s returns in recent years, and the unsustainably high valuations of these same stocks.
This was promptly rebuffed by many commentators, citing the evidence of Goldman Sachs’ previous 10-year forecasts (in 2012 and 2022) having been too pessimistic vs. the actual performance since then.? A much more positive base case for S&P 500 returns has been proposed that the US is in fact in a “roaring 2020s” period of growth, and it’s fair to say that, while the jury is out on what the economic impact of a new Trump term will be, the fact that he sees stock market performance as an important metric is encouraging.? That said, we will note again that the political shade of the US president is irrelevant to stock market performance over the long term:
If the chart above looks a little “precarious” then it’s worth reminding ourselves that considering “Price” in isolation is misleading.? Better, instead, to consider the “expensiveness” of US equity (by adding the context of “Earnings”) as indicated by the P/E ratio, over the same 100-year period:
Expensive?? Yes, but not outrageously so, based on Price/Earnings.? And so, we repeat the mantra to “get invested, stay invested, and resist the urge to time the market”.??
If companies are given room to grow their Earnings (the “E” of P/E) then we will inevitably see that the Price investors are willing to pay will rise accordingly and, all-importantly, help our investments to outpace inflation.