11/25/2024 Market Strategy
Ch-Ch-Ch-Ch-Changes
As Much as it Can Provoke Resistance for the Uninitiated, Change Remains a Constant in Life and in the Markets
Key Takeaways
- With 462 or 95% of the firms in the S&P 500 index having reported earnings thus far, results are showing a robust third quarter. Profits in Q3 overall were up 8.2% from a year earlier on 5.1% revenue growth.
- Eight of the 11 sectors have positive earnings growth, with five at double-digit rates. Three sectors are showing declining earnings, with one (energy) falling at double-digit rates.
- Last week’s data on housing starts showed some softening in the housing sector in October although continued disruption from major storm systems no doubt curtailed some activity.
- This week brings data on inflation for October as well as revisions for Q3 GDP. In addition eight firms are due to state earnings as the Q3 reporting season winds down. .
In our view patience and right-sized expectations are best engaged by investors in dealing with the process of normalization tied to interest rates and stock market dispersion in the current environment. Time in the market rather than trying to time the near-term direction of the market should in our opinion help avoid over-reacting to the news and developments of the day to day that can vary the direction of a broad array of asset classes.
The US equity market rally from the summer low (August 5) and from election day (November 5) points to a broadening in sector, market capitalizations (large, mid, and small caps), style (growth and value) this year not withstanding day to day market machinations which on some days can suggest a narrowing of sector leadership while on other days a broadening of sector leadership.
Given market sensitivity to economic data, earnings results, guidance from corporate managers, and varied investor and trader sentiment du jour, it’s not surprising that news items as diverse as that which is idiosyncratic or even broad-based developments that cross the news crawl can generate excitement or jostle sentiment and obfuscate opportunities midst near-term uncertainty.
In our view since the US election, the markets and the asset classes they serve have unsurprisingly become subject near term to bouncing between gains and losses as traders ponder the short-term advantage of the day, and investors consider to what degree the risk and opportunities that surface might affect their portfolio’s performance.
Based on the depth and breadth of the transitions in progress at this time in monetary policy, on Capitol Hill and in the change of Administration along with what appears to be a water shed period in technological innovation, some market participants can’t help but wonder if they should be adjusting their portfolio exposures for a myriad of outcomes espoused by various market pundits with widely divergent views and opinions.
For one, while the pace of inflation appears to be slowing enabling the Fed to move towards more rate cuts in the months ahead, the latest CPI numbers showed some inflation stickiness that has proved irksome to those with great expectations for more frequent and deeper interest rate cuts
In our experience, the nature of inflation tends historically for it to prove stickier than most market participants and monetary policy makers would like even when central banks are taking the right action and making progress to put it in check.
Q3 earnings have surprised to the upside while corporate guidance (management’s forward view) has been somewhat mixed and consensus analyst opinion, while positive through the end of this year, has become somewhat cautious looking towards next year. That said, cautious guidance by corporate managements has become fairly standard in recent years and near-term consensus analytical expectations have tended to move lower ahead of the next earnings season.
As market professionals, it would seem to us that patience is an essential virtue for investors in rightsizing expectations in an environment like the current one to avoid over-reacting to the day-to-day level of uncertainty that naturally exists in the markets.
Knowing what one owns and having realistic expectations as to how the asset classes and components held in a diversified portfolio–a portfolio that’s suitable to one’s needs, goals, objectives, experience, and risk tolerance–are likely to respond can, in our experience, prove helpful in avoiding over-reacting to near-term market choppiness.
We remain positive on equities and look for opportunities within the asset class across sectors, market capitalization, style, and those areas that offer the potential for total return (capital appreciation and dividend income).
As prospects persist for the Fed to continue the process of rate cuts (if not as dramatically as some might expect or want) we look for mid-and small cap stocks to gather increased investor attention in a broadening of the rally in equities through the end of this year into next year.
Current yields in fixed income suggest to us an environment where bond issuers once again are having to pay for the privilege of borrowing money providing bond buyers an opportunity to get something in return in the form of attractive yields compared to the last decade.
The path to interest rate normalization currently being orchestrated by the Fed in our view offers additional opportunity for investors looking for further diversification of their investment portfolios. Our expectations are for the yield on the US 10-year Treasury to be in a range from around 3.2% to as high as 5% as the economy and process of rate normalization works its way through the system over the course of the next twelve months.
In this Thanksgiving holiday abridged week, markets will be focused on economy data and earnings results of those companies that have yet to report in the Q3 earnings season.
We wish our readers a Happy Thanksgiving and safe holiday travels.
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