by Jason Norris
Director
Equity Research and Portfolio Management
In October 2022, the S&P 500 hit a low of 3,577, which was 25% lower than at the start of the year. The Federal Reserve had just started an aggressive interest rate hiking cycle and 100% of Wall Street economists were calling for a recession by 2023. We believed otherwise.
Source: Bloomberg.com
What made our call different than the consensus was two key metrics. First, the U.S. economy was at full employment, a historic low of 3.5%. Also, hourly earnings were at an all-time high and had increased 15% from pre-COVID levels. In other words, the U.S. consumer was employed and making more money than they had in the past. Thus, with the U.S. economy at over 70% consumption, we predicted there would be no recession.
Now, two years later, with the S&P 500 up close to 65% and longer-term interest rates stable around 4%, where do we go from here? The general sentiment looking toward the rest of 2024 is “so far, so good.” Two major banks reported earnings on Friday and gave relatively positive commentary on the U.S. consumer. J.P. Morgan CFO, Jeremy Barnum, stated, “the consumer is fine and remains in effect on strong footing.” Wells Fargo reiterated that point, however, expressed concern about lower income consumers. This is an area of the marketplace we are watching to gauge the overall health of the economy. While jobs and wages are keys to consumer spending, we are also monitoring the health of that spending. The chart below highlights the overall delinquency rate for credit cards and while it has been increasing, it is still not overly concerning.
Source: Federal Reserve Bank of St. Louis
Even with higher interest rates, the health of borrowers continues to be at an all-time high. The average credit score (FICO) is still at record levels. This has been brought higher by those at the lower end of the spectrum, meaningfully improving their credit.
Therefore, with the job market healthy, and the rate of inflation subdued, this sets up a good environment for equities as earnings growth should continue.
Uncertainty is the Only Certainty
Second quarter earnings growth was over 10%, the highest in two years. As the third quarter earnings are being reported, we anticipate they should continue a healthy trend, but at a lower rate, closer to 5%. However, there are many global macro issues that may take center stage. Geopolitical issues in the middle east and eastern Europe, policy surprises in China, natural disasters in the southeast United States and, finally, the upcoming U.S. election. While the economy should be the focus long term, short-term volatility will increase over the next few weeks. This may coincide with weakness in equities. Over the last four presidential elections, investors saw negative returns in the month of October, however, history suggests that the fourth quarter usually prints a positive number overall.
We are recommending our clients to focus on the economy over the “noise” which may impact short term market movements. And what we see is the economy remains healthy.
Takeaways For the Week:
Inflation data is subdued but slightly exceeded expectations which resulted in an increase in the yield of the 10-year U.S. Treasury from 3.98% to 4.07%
Equities welcomed the news of continued healthy growth resulting in the S&P 500 rising close to 2% for the week