Weekly Thoughts: October 28, 2024

The story for the week of October 21st was in the treasuries as the rise in yields since the FOMC’s decision to cut rates last month has caught many by surprise due to the magnitude of the move. The 10-year traded as high as 4.27% this past week before closing at 4.236%. Note that the yield was 3.63% on 9/16. The is a mammoth adjustment in a short period and is due to the realization that despite more anticipated rate cuts, the economy remains solid. A second catalyst has been the lack of either presidential candidate to discuss deficits and in fact, to varying degrees, both are proposing policy that would worsen that situation while potentially igniting inflation. Bonds are voting thumbs down.

Equities traded in a tight range, with a dip below the 5800 level on a weak Wednesday that saw the S&P fall below 5770 before a late day rally took the index back to 5809. For the week, the S&P was lower by 0.95%, ending a 6-week streak of gains. The Nasdaq fared better with a gain of +0.14%. Economic data was on the light side and the action was more stock and sector specific as we are now in the heart of earnings season. New Single Family Home Sales beat consensus expectations, with a 0.738 million annual rate versus expectations of 0.72 million. This marked a 4.1% increase in September & Sales are up 6.3% from a year ago. Median price of new homes sold was $426,300 in September, unchanged from a year ago while the average price of $501,000 was down 2.7% YOY.

New Orders for durable goods declined 0.8% in September for the third drop in four months. Prior months were also revised lower but it should be noted that transportation orders swing wildly from month to month as preorders for big aircraft can be lumpy and aircraft orders fell 15.1% while defense aircraft dropped 2.5%. Excluding the transportation sector, orders for durable goods rose 0.4% and therefore one can conclude that this is another check in the steady economy category. Nevertheless, we would note the “core shipments” fell 0.3% on top of declines in August & July…this is a troubling trend as the decline in total for Q3 was 2.8% annualized versus the Q2 average, & represents the largest quarterly fall since Q2 2020.? Economist Brian Wesbury states that while we are looking at a solid GDP result next week, this last piece of data is a warning sign about growth in the coming quarters.

Earnings results were a dominant driver outside of a focus on the higher treasury yields. At a high level, earnings have been generally solid but there are many key companies that have yet to report. Almost a third of the S&P earnings results arrive this week [10/28-11/1] with 162 announcements. Multiple large weighted stocks such as Amazon, Alphabet, Visa, McDonald’s, Meta, Microsoft, Apple, Exxon & Eli Lilly are just some of the significant reports that may drive activity.

There are multiple key pieces of economic data coming this week. On the inflation side, the PCE Index & employment cost index arrive on Thursday. The first look at Q3 GDP that has a robust forecast of +3.2% will combine with Initial Jobless Claims, the October non-farm payroll report & the headline unemployment rate to provide an indication on the state of the economy. NFP payrolls expected at a modest +110,000, lower than last month’s +254,000 result. We are laser focused on the revisions as payrolls have missed the mark the first round over recent years at a percentage greater than the pre-pandemic world. Statistical challenges aside, the revisions are essential as investors are keen about looking at trends that provide a better view of strength or weakness. The unemployment rate is predicted to remain at 4.1%. Additional releases include Manufacturing PMI, wholesale & retail inventories and consumer confidence.? This week’s batch of data will have an impact on the Fed’s thinking for their meeting just after election day on November 7th.

Speaking of the election—yes, we always say keep politics out of your long-term investing plan but uncertain outcomes and stresses can cause market volatility. One would conclude after such a large bull run since October 2022 [S&P is up 65% from the correction low] investor bullish measurements would be dangerously high but the tools strategists use to measure investor views on the equity market fall in the “wary” category. Note that over bullishness is often used as a contrarian indicator, meaning correction may be imminent. Yet here we are near all-time highs and the investor class is concerned. Our conclusion is the election has folks not only polarized about the candidates, but perhaps overestimating the immediate impact of the new president and nervous with uncertainty.

Yes, there are many talented economists and analysts producing information on the possible results of former President Trump’s or Vice President Harris’ proposed policies on growth, inflation deficits & debts. Our team intends to analyze policy and not election promises and a big part of that is linked to the House & Senate results. A clean sweep by either party will be unhelpful for those that hope for a degree of improvement on debt and deficits. While our job is not to advocate for either candidate, we would note, to varying degrees, it is clear to us that there is a whole lot of “over promising” going on and the question will ultimately become what becomes law and thus impacts American business.

Finally, over the past weekend, Israel conducted a retaliatory strike on Iranian military facilities in three separate provinces. There were no early reports of Iranian oil or nuclear facilities being struck. Israel says the “mission was fulfilled” and the strikes were completed. Iran condemned the attack and called for the international community to as well. Iran asserts its right to defend itself against external aggression. Iran had previously stated it did not seek a wider regional war but called for the end of Israel’s “genocidal actions in Gaza and Lebanon.” The Israeli strike was in response to the October 1st Iranian missile barrage of over 200 rockets fired at Israel.? As the conflict has expanded beyond Gaza, the prospect of a wider, multi-nation conflict in the region has been a prime geopolitical overhang for the world economy. For markets and economy, oil prices as well as shipping in the Red Sea and the prospect of the Strait of Hormuz being shut down are chilling beyond the obvious human toll. Those dominoes would be market bending events.

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