Predictions that the Fed will cut 50 bps at its next meeting have vanished
The U.S. job market has risen from the grave with monstrous growth—some 254,000 jobs emerged from the shadows in September, far exceeding the predictions of economists. Restaurants, retail stores, and construction sites are teeming with new hires, while wages have risen, giving workers a much-needed boost in purchasing power.
But beware, for not all sectors are enjoying this economic treat. Manufacturing remains in a slump, with job losses impacting the industry. Moreover, uncertainty about the upcoming presidential election lurks, threatening to disrupt this momentum. And, rising bond yields are causing mortgage rates to move higher which will dampen the jump in refinancing activity and potentially prolong the housing inventory shortage.
Despite these uncertainties, the Fed seems to be taking a “wait-and-see” approach. The strong jobs report may encourage them to continue their slow and steady approach to lowering interest rates. The magnitude of interest rate cuts may also be much shallower than currently forecast if September’s job gains are repeated in coming months. Only time will tell if this jobs boom is a trick or a treat, but for now, the economic spirits are smiling upon us this Halloween season.
Stock market and corporate earnings momentum continue to lure investors
The stock market seems to be casting its own spell, with the S&P 500 Index experiencing a surge for the fourth consecutive quarter. The index has achieved a 66% total return over the past two years. But beware the tricks of this market, for a closer look reveals a concentration of power, with a mere three stocks—NVIDIA, Microsoft, and Apple—responsible for almost a third of those gains.
The S&P 500’s recent performance rests heavily on the shoulders of a select few. This concentration, unseen in the past 30 years, has left market analysts wary of further gains led by this select group. While the market has sustained this surge for now, investors may need to brace themselves for a slower pace in the future, lest they be caught off guard by a sudden market shift.
However, there are glimmers of hope shining through the economic fog. Earnings are projected to rise about 5% Y/Y during the third quarter and almost 15% during the fourth quarter, which would result in full-year 2024 profit growth of 10%. This suggests that the market’s gains may be more than just a trick. However, investors should remain cautious as valuations are at historic highs and likely already discounting strong earnings growth in the years ahead. Investor sentiment can shift quickly when surprised by any host of unexpected events.
While the overall outlook appears positive, with earnings growth expected to continue, a sense of caution lingers. The upcoming presidential election adds another layer of uncertainty, leaving investors to wonder if this bull market will continue its reign or become another victim of the season.
Can the market’s treats of the past two years continue, or is there a trick in store?
As we head into the final quarter of the year, the market is exhibiting a spectacular, multi-year performance. This surge is reminiscent of the market in 2010 and 2017, both followed by periods of stillness.
While the market’s current trajectory may seem like a treat, history warns of potential dangers. The market tends to shift, and this surge could be followed by a descent. Previous instances of such momentum have led to periods of volatile swings, leaving investors trapped in a limbo of gains and losses. I don’t know if we are quite there yet, but I think about Warren Buffet’s advice when I try to square market valuations today with macroeconomic and corporate earnings growth prospects: “Be fearful when others are greedy, and be greedy when others are fearful.”
Should investors be spooked? Perhaps not. While the future remains unclear, the market’s momentum cannot be used as a signal of when that momentum will end. Nonetheless, the sustained gains such as we have experienced these past two years rarely last beyond three years, with the only recent exception being the dot-com bubble in the late 90s.
Only time will tell if the current AI revolution will sustain the market advance like the internet did, or if this rally will vanish. In fact, a sideways market while earnings continue to grow would be healthy and set the foundation for the inevitable move higher over time.
Congressman Steve Scalise turns 59 today, California Governor Gavin Newsom turns 57, former quarterback Brett Favre is 55 today and singer/actor/dancer Ben Vereen is 78.
Christopher Gildea 610-260-2235