Weekly Thoughts: November 4, 2024

Global equity markets experienced mixed movements last week, with the NASDAQ setting a new all-time high as major tech components announced earnings. Alphabet had stellar results, with EPS up 37% YOY and Amazon’s results also added to the generally solid tech reports. Microsoft & Meta, while beating expectations, saw their stocks hit as their forecasts were not rosy enough for investors to add to their already strong YTD returns. On the macro-economic front, Core PCE met consensus forecast, leaving the Fed on track for a 25bp cut this week. Market interest rates fluctuated in the higher end of the recent range, with the 10-year treasury closing near the high of the week of 4.388%. Despite the fact that we believe the Fed will cut, the 2-year reached the highest level since the Fed cut in September and closed at 4.21%. Markets expect cuts, but as each week passes and data shows economic resilience, fewer easing moves are getting priced in then believed in the aftermath of the September FOMC cut.

A deeper analysis of the inflation data is a two-sided coin. First, overall US inflation stands at 2.1%, the lowest since early 2021. But the Fed’s preferred measure experienced its largest monthly gain since April. The core personal consumption expenditures price index which strips out volatile food & energy, increased 0.3% in September. Consumers spent more on goods and were bolstered by solid wage gains which, while a positive for folks struggling to make ends meet, may be a harbinger for more inflation as employers must pay up for hiring. This unvirtuous cycle could add downward pressure on employment.

The Friday non-farm payroll report was +12,000, far below the consensus of +100,000. The two hurricanes contributed to the sub-par result but does not explain the downward revision by a total of 112,000 in August & September. The unemployment rate remained steady at 4.1%. There are reasons to believe that the data may rebound next month but those more concerned about the job market strength view last month’s excellent result as the outlier; the slowing experienced in the spring and early summer, they believe, was merely interrupted by the strong month and a broadening downshift in the economy is at hand. There will be great focus on this final quarter to see which trend takes hold. One area of concern is that the revisions which reduced NFP by 112k for Aug & Sept were almost all from private sector jobs and that is certainly not due to Hurricane Milton.

An additional subpar piece of economic data was the ISM Manufacturing Index which declined to 46.5% in October. The index had only five major industries report growth while 11 reported contractions. The indexes for new orders and production are firmly in contraction territory, as both have remained below 50 since June. Economist Brian Wesbury notes that some companies have scraped by focusing on order backlogs which were boosted for an extended time with pent up activity from the COVID years. An additional ominous part of this report was the prices paid index increased to 54.8 in October with 11 industries paying higher prices for the month. Therefore, those that are concerned inflation is not vanquished or could possibly reignite have underlying data to support the possibility.

For the week, the S&P fell -1.37% with the damage done on Thursday [-1.90%] when the previously mentioned Microsoft & Meta declines shook many of the large tech names in the cap weighted index. A modest rebound on Friday allowed the S&P to finish October with a small +0.35% return, and extended the streak of positive months to six. The coming week will include more earnings results, Factory Orders, ISM Services, Initial Jobless Claims, the FOMC decision and –in case you were unaware, a significant election on Tuesday.

The presidential race will capture all of the oxygen in the country but as far as our job of deciphering economic and market reaction and direction, we need to know the whole Federal Government picture. Therefore, the makeup of the US Senate and the House of Representatives will determine what policy and laws President Trump or President Harris can achieve. Logic tells us even if their party controls all, delivering on the extraordinary number of “promises” over the campaign is unlikely. Of course, a divided government will result in gridlock and since neither candidate appears to be focused on the elephant of debt our country carries, gridlock may, for now, be the only work toward less growth in spending. Time will tell and we know each of our clients have strong feelings and views about the state of our country but would like to remind everyone that for all our warts, the United States remains the best functioning economy and strongest nation in the world. Perhaps at this low ebb in unity, America will begin to reemerge to a more civil and productive country. It won’t happen overnight, but sometimes progress—like markets—start a better trend when the environment appears to be darkest.

From an equities standpoint, once we know the next president, there will be industries that stand to benefit and others that may experience wind in their faces. We remind folks that their partisan “gut” feeling to flee if their candidate does not win is usually the wrong move, certainly in the long run. In fact, in recent weeks, some view the movement in certain sectors and areas such as bitcoin as affirming the improvement in former President Trump’s polling. However, in the final days, as polls remained tight, many “Trump bets” have been reversed and investors are preparing for such a tight finish that a winner may take days to be declared. The VIX or volatility index has risen and some have chosen to hedge the uncertainty.

Additionally, the move higher in the treasury rates may be attributable to more then the resilient economy; the bond market may be signaling that neither candidate appears to be focused on deficit reduction and when proposals are taken in sum, President Trump’s policies may well add more to the already outsized problem. ?Vice President Harris is not considered a panacea for the deficit either. Market rates in bonds are a key driver in our economy and the 70bp increase since the Fed cut means mortgage rates are higher as well as the cost of corporate debt. It is possible that from now until Inauguration Day in January, there are headline risks based on this race, long before the new administration enacts policy.