Commentary for November, 2024

Hello all - we hope your November was as good as it was for the markets.

A post-election ‘Trump bump” gave the markets a boost to new record highs this month.  The Dow saw a gain of 7.5%, the S&P 500 rose 5.7%, and the Nasdaq, which has a higher concentration of tech stocks, added 6.2%.

Here’s a look at how the markets moved this month:

Here’s a look at how the various sectors of the market performed:

This year has quietly been one of the best years on record.  In fact, the S&P 500 is having its second-best year since 1998.

Much of the performance is coming from a small handful of tech names mostly related to the AI boom.  As you can see in the chart below, the performance of these seven tech names far outpaces the broader market.

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ELECTION

This month’s election of Donald Trump as President gave a breath of fresh air to the markets.  The business environment is poised to be much better, with favorable tax rates and regulations.  The reaction was swift and stocks had their second-best election week performance since FDR (the best week was actually under Biden).

While the economic backdrop looks promising, one concern remains the tariffs.  

Investors got a small taste of the tariff announcements this month when Trump announced new tariffs on Mexico and Canada.  The markets initially fell on the news, but quickly turned and resumed their climb. 

While the economic and investing environment looks to be favorable in the coming years, investors must stay on their toes for surprise announcements like this.  

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FED

Switching gears, the Fed held one of their policy meetings this month and announced another reduction in their interest rates, which makes it cheaper to borrow money.  It was widely expected by investors, but markets still cheered the news.

 

In their meeting minutes that were released a few weeks after the meeting, investors noted that the Fed sounded less likely to lower rates in the future.  The Fed members talked extensively about being more “gradual” and “cautious” on future rate cuts. 

The timing of this caution by the Fed shouldn’t be ignored.  With a new administration in place, they may be less inclined to “help” the economy.  

Even discussing the role of politics in the Fed’s decisions is quickly shut down by financial commentators.  However, it’s easy to see how political the Fed members are and they all lean in the same direction.  

Two former members of the Fed are part of the Biden administration.  Lael Brainard was a Federal Reserve Governor and is now the Deputy Treasury Secretary.  Janet Yellen was the former Chair of the Fed and is now Treasury Secretary, often taking to the press to advocate for Biden policies.  

Additionally, we had former NY Fed President (seen as the #2 position at the Fed) Bill Dudley outright advocating for the Fed to tank the economy in 2019 to prevent the re-election of President Trump. 

We may see a fight brewing at the Fed where they try to slow the economy and a Trump administration who wants them to do the opposite.  The Fed has been very important in boosting the markets, so it may cause turbulence for investors in the coming years.

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DEBT

One major issue for the Trump administration to be concerned about is the debt level.  Our interest payments on the debt have skyrocketed in recent years.

It isn’t even the total debt load that is our main concern.  Our issue is the amount of debt coming due next year that must be refinanced.  

Treasury Secretary Yellen loaded up on short-term debt in order to finance the increase in government spending, allowing the next administration to worry about the problem. 

The amount of debt may cause issues in the market and is another headache for investors.  

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ECONOMIC CONCERNS

We’ve discussed our concerns about the economy a lot in recent months.  Indeed, there looks to be a slowdown in economic data, but since the election, the indicators we follow for recession probabilities have actually improved.

Specifically, we’ll look at the yield curve, which is something we’ve talked about often.  We won’t go into specifically what this is, but the chart is what’s important.  

In the chart below, note how the blue line dips down and pops back above the black horizontal line.  Every time this happens a recession follows (a recession is noted by the gray shaded area).  It had recently risen sharply and it seemed like a recession was near, but the line started to turn lower after the election.  

This tells us that a recession isn’t as imminent as we thought - but the threat is still looming.

Here’s a similar chart, but with a different bond maturity.  It, too, shows the risk of a recession has receded as the line has moved lower since the election.

Another recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index continues to be negative, and it has never gone this long without a recession following.

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INFLATION

Let’s take a look at the inflation data from this month, where the annual inflation rate had been moving lower, but now appears to be stalling.

That metric is looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising, just not as quickly.  That means prices are still going up, just not as fast. 

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month. 

The PPI, which is the inflation at the business level before they pass on the price increases to us, rose again last month.

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OTHER ECONOMIC DATA

Economic data released this month was mixed.

First, we’ll look at employment figures, where just 12,000 jobs were added last month.

We saw this next chart and thought it was too incredible to not post.  It shows the number of government jobs has risen sharply.

As for the strength of the manufacturing and service parts of our economy, manufacturing remains stuck in a contraction, but the service side of our economy continues to look good.

Retail sales saw a slight increase on the month. 

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a tiny increase.

Sentiment surveys took a sharp turn higher after the election.  Economic optimism has risen dramatically. 

Consumer confidence saw a nice increase:

Small business optimism moved higher, too:

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YOU COULD ALREADY BE A MILLIONAIRE

Great headline, right?  But it’s true.  If you have any bananas in your house, you could be a millionaire.  

An actual headline:

You may have seen this story in the news.  An “art exhibit” that was nothing more than a banana taped to a wall sold for $6.2 million.

While it is clearly ridiculous, investors should take note of these types of events – absurd stories like this often come at market tops.  

The buyer is a crypto currency executive.  After the dramatic run crypto prices have had recently, it may signal we are nearing a top in the crypto sector.  

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Where does the market go from here?

Stocks are on the expensive side here.  However, the amount of new money pushing stocks higher has been steady and has shown little signs of abating. 

While we would be hesitant to add new money at this point, we think a continued rise in the market is more likely.  

An employment report later this week and another Fed meeting near, both events have the ability to change the trend in the market.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for October, 2024

Hello all - we hope you had a nice October.

Stocks started the month moving modestly higher, but a late-month decline pushed the indexes into negative territory.  The Dow closed down 1.3%, the S&P 500 fell 0.9%, and the Nasdaq, which has a higher concentration of tech stocks, lost 0.5%.

 

Here’s a look at how the markets moved this month:

Here’s a look at how the various sectors of the market performed:

Bonds were a big topic this month.  Bond yields rose sharply, so your bond prices have fallen.

Last month, the Fed announced a rate cut which was intended to lower borrowing costs.  Since the announcement, however, the bond market has done the exact opposite of what the Fed wanted.  Bond yields (rates) have gone higher, not lower.

This means borrowing costs are going higher, which is the exact opposite of what the Fed wanted.

What’s the reason for the sudden rise in yields?  No one’s really sure – and we’ve heard many theories.  

It could be because the U.S. debt level is rising dramatically, so investors want higher yields as protection.  It could also be a need to keep up with higher expected inflation.  Or the debt ceiling fight coming up.  Or the uncertainty around the election.  Or maybe its because the economy is doing well and further rate cuts won’t be needed.  

Either way, the sudden rise in bond yields is concerning.  

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ECONOMIC CONCERNS

Speaking of bond yields, they can be a great predictor of the economy.  And they are telling us a recession is closer than ever.  

First, we’ll look at the yield curve, which is something we’ve talked about often.  We won’t go into specifically what this is, but the chart is what’s important.  

In the chart below, notice how the brown line dips down and pops back above the black horizontal line.  Every time this happens a recession follows (a recession is noted by the gray shaded area).  If history holds true, this chart suggests that a recession is very near.

Here’s a similar chart, but with a different bond maturity.  It shows a recession is a little further away, but still on the horizon. 

Another recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index continues to be negative, and it has never gone this long without a recession following.

Finally, another recession indicator is the level of bankruptcies, which continue to rise.

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ELECTION

From an election standpoint, I wouldn’t want to be president with these economic clouds on the horizon.  It could spell a tough first year for whomever is in the White House.  

As it stands now, the market is leaning towards a Trump win, but it’s still anyone’s guess how it will play out. 

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CORPORATE EARNINGS

Earnings for the third quarter started coming in this month and we are about halfway through the stocks in the S&P 500.  

Companies still look to be doing well.  Earnings are growing at a nice pace and revenue has been solid, although the bar was set pretty low for these results.

A lot of focus has been on the big tech names, which have driven a lot of the gains in the market. Of the results so far, all have performed well – but there has been one concern that sent their stocks lower.  The amount of money they are spending on building AI programs is very, very high.  It may pay off in the long run, but investors are concerned at this time.  

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INFLATION

Let’s switch back to economic data and look at the inflation data from this month, where the annual inflation rate continues to move lower.

But that’s looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising, just not as quickly.  That means prices are still going up, just not as fast.

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month. 

The PPI, which is the inflation at the business level before they pass on the price increases to us, rose again last month. 

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OTHER ECONOMIC DATA

There were some bright spots in the other economic data released this month.

The GDP for the third quarter showed a decent gain of 2.8%. 

Jobs data released this month was decent, too.

However, excluding government jobs, the picture is less-rosy.

The level of job openings continues to decline, too.  This is concerning because the stock market and level of job openings tend to move together.

As for the strength of the manufacturing and service parts of our economy, both saw an improvement last month.

Retail sales saw a slight increase on the month. 

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a decline.

Consumer confidence saw a nice increase:

Small business optimism moved slightly higher, too:

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Where does the market go from here?

The market is looking more attractive here.  However, there will be a lot to move markets in the coming weeks.  Next week, in particular, will have a great impact for the market with the election and the Fed meeting.  

Regardless of who wins the election, stocks tend to rise from here through the end of the year. 

One concern we have is that EVERYONE thinks the market will go higher from here.  When investors get too optimistic (or pessimistic), markets tend to do the opposite of what everyone thinks.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.