October 14, 2024

Happy Columbus Day!

  “The entrance strategy is actually more important than the exit strategy.”

Edward Lambert

As in life, investing, and politics it is getting in the game that matters. Quick summary: Equity markets set new highs last week after a double-shot of news gave the market a dose of reality. The October read of CPI came in above expectations, belying the need for aggressive FOMC rate cuts, while jobless claims data came in at the highest level in two years.

Here are the numbers, the S&P 500 set another record with a gain of 1.35%, the Dow Jones Industrial Average also reached new highs up 1.36%, Nasdaq also gained 1.45%. Internationally, the FTSE 100 was off slightly, down .33% but the MSCI-EAFE gained .39% for the week. The 2-year treasury closed with a yield of 3.94% and the 10-year paid 4.072%.

U.S. stocks rose to records last Friday as big banks rallied following a run of reassuring profit reports. (We are entering 3rd Quarter earnings season.) The S&P 500 climbed 0.6% to top its all-time high set earlier in the week and close out its fifth straight winning week, while the Dow Jones Industrial Average jumped 409 points, or 1%, to set its own record. The Nasdaq composite lagged the market with a gain of 0.3% after a slide for Tesla kept it in check.

Big banks and other financial giants traditionally kicked off earnings season and did so with a bang. JPMorgan Chase climbed 4.4% after reporting a milder drop in profit than analysts feared. It was the strongest single force pushing upward on the S&P 500. CEO Jamie Dimon said the nation’s largest bank is also still buying back shares of its stock to send cash to investors, but the pace is modest “given that market levels are at least slightly inflated.”

On the inflation front, As Market Beat reports, The Bureau of Labor Statistics reported last Friday morning that the overall consumer price index eased to 2.4% year over year in September. The monthly inflation rate continued to be relatively benign, measuring just 0.2%. But core inflation, which excludes food and energy costs, didn’t budge much last month. Core CPI measured 3.3% year over year in September—an uptick from the 3.2% rate recorded in August. On a monthly basis, core inflation was 0.3% last month, the same pace as August. Prices paid by producers were 1.8% higher in September than a year earlier. That was an improvement from August’s year-over-year inflation level, but not as much of one as economists expected. Analysts said it likely helped calm worries stirred a day earlier, when a report showed inflation at the consumer level wasn’t cooling as quickly as economists expected. The bottom line seems to be that economists don’t see September’s larger-than-anticipated gain as a signal that inflation is accelerating.

In the bond market, Treasury yields were mixed following the latest updates on inflation at the wholesale level and on sentiment among U.S. consumers. The inflation data does, however, take another half-percentage-point cut off the table. Meaning, look for a 25 Basis point cut, not 50 basis points. After last Friday’s reports, traders built their bets that the Federal Reserve would cut its main interest rate by a quarter of a percentage point at its next meeting, according to data from CME Group. Regardless of how much the Fed cuts rates by at its next meeting, the longer-term trend for interest rates remains downward, according to Solita Marcelli, chief investment officer Americas, at UBS Global Wealth Management. That should offer an upward push to stock prices generally.

A separate report on Friday suggested sentiment among U.S. consumers is lower than economists expected. But the preliminary reading’s decline in sentiment was still within the margin of error, according to Joanne Hsu, director of the University of Michigan’s Surveys of Consumers.

The jobless claims raise fears of a recession even while inflation remains hot. At 258,000 weekly new claims, the unemployment data shows a sharp increase in newly jobless Americans but is offset by a decline in total joblessness. The takeaway is that the data remains spotty, and the US economy is on track for a soft landing. Last week, the strong jobs report for September eased fears that the labor market might weaken dramatically in the near term. However, Federal Reserve officials still cite a weaker-than-expected labor market as one of the biggest risks facing the economy.

In the Real Estate world, U.S. home buyers are already weary of a market that’s expensive and crowded, with little inventory. Now add the additional headache, home insurance — both the cost and the availability — has begun tripping up some home buyers. Buyers are finding it so hard to get insurance that in some cases it jeopardizes their entire home purchase. In most cases, buyers are required to have insurance coverage if they’re taking out a mortgage to finance the purchase. Nationally, home sales have yet to be adversely impacted by home-insurance costs or lack of coverage, the National Association of Realtors told MarketWatch.

In other significant news, Social Security payments will increase by 2.5% in January, translating to an average increase of about $50 per month for over 72 million beneficiaries in 2025. That’s down from the past two annual benefit hikes. For 2024 the increase was 3.2%, following a historically large 8.7% increase in 2023 brought on by the high inflation rate at that time.

This week, you will see us trim our positions in short term bonds and reallocate to a bit longer maturity (following the old adage as interest rates fall bond prices rise), so look for us to extend maturities in the fixed income asset class. Further, we have been sweet on both Small Caps and Foreign stocks. For the past 15 years, large-cap stocks have significantly outperformed small caps, and with good reason. Initially, they were a safe haven from risks following the 2008 financial crisis, benefiting from the zero-interest-rate policy that allowed larger companies access to long-term, low-cost funding. More recently, the largest companies, known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla), have been pioneering the technologies of the future. Most importantly, the foundation of their outperformance has been a period of exceptional large-cap earnings, which rewarded large-cap investors. For some time now, smaller U.S. companies have been trading at a significant discount to large caps. Even with the recent shift in performance toward small caps since July, the asset class remains attractive and will make some additional transitions to those asset classes in the coming weeks.

Finally, I will remind everyone to get out and vote early or on November 5th.

Mike