Where Do We Go from Here? 

Five Things You Should Know

1. Equity Markets – rose this week with U.S. stocks (S&P 500) up 1.63% and international stocks (EAFE) up 0.41%. 
2. Fixed Income Markets – were up this week with investment grade bonds (AGG) up 0.15% and high yield bonds (JNK) up 0.33%. 
3. Earnings Season Wrapping Up – Q3 earnings season wraps up for the most part this week as most S&P 500 companies have already reported. While as expected a lot of focus was on the Mag 7 stocks, earnings as a whole were in-line with expectations, with U.S. equities up 3% since earnings season began in early October.
4. China Sets Expectations – President Xi Jinping met with President Biden this week to reiterate China’s “four red lines” approach to impending President Trump. Those include 1) avoiding moves that undermine the Communist Party’s grip on power 2) avoid pushes towards democracy 3) contain its economic rise and 4) don’t encourage Taiwanese independence. While the expectations from China were made clear, it remains to be seen how serious the new regime will take those requests.
5. Key Insight – [VIDEO & ARTICLE] After a year full of plenty of hand wringing by investors and markets around the path of inflation and national elections, markets appear to have settled into a range. What is driving markets today? And what is likely to drive them in the years ahead? We tackle those questions and more this week.

Insights for Investors

By Tim Mitrovich

Where Do We Go from Here?

People, especially those the media and those that follow the media closely, love to speculate on the why of day-to-day market movements and of course, where things all may be headed. The build-up to the election and few subsequent weeks certainly were no exception. 

As I write this, the world anxiously awaits the results of everybody’s favorite AI story stock and continues to focus on the path of Bitcoin. 

If the last few weeks in the market, let alone all the info we armed you with leading up to the election, have shown you anything it’s that the market cares far less about politics they most people, and at the moment is still far more focused on the Fed and path of future rates cuts. 

After the initial market surge post-election, the market experienced a bit of a pullback, which likely had little to nothing to do with politics and just about everything to do with the path of inflation and Fed’s future ability to cut rates which are in question again given the recent CPI and PPI inflation data. 

TrendMacro summarized the situation this way, saying “A very optimistic market reaction to a largely at consensus CPI print. It was a slight miss, actually. The whisper number must have been awful. Feels to us like we have “stick the landing” inflation at this point, approximately at the Fed’s target. Disinflation is likely over now. The path of the funds rate is now just a matter of what the FOMC thinks “neutral” is. We suspect that’s higher than they are saying out loud.” 

Fed Chair Powell seemed to hint at this as well stating last week, that “The economy is not sending any signals that we need to be in a hurry to lower rates” and “I expect inflation to continue to come down toward our 2% objective, albeit on a sometimes-bumpy path.” 

This isn’t all bad news, unless you are overallocated to overpriced tech stocks (see August’s sell-off on rate fears), as a higher neutral yield and higher interest rates in general will once again reward savers and those seeking to have more diversified portfolios. While fewer cuts would temper the overall risk appetite of the market, the recklessness of the last few years as a result of rock-bottom rates and corresponding undisciplined borrowing is nothing any of us should hope to repeat. Such excesses lead to crashes, as opposed to a slower but more assured path forward for investors. 

We shared a couple of great charts back in our Commentary from October 18^th showing the overpriced state of the general US large cap equity market, but also the relative value of other parts of the market, and of course the chart showing the strong correlation between the price and investor pays and the 10-year corresponding expected return.  

Valuation is NOT a catalyst, and markets can stay elevated for a period but investing with the belief that price doesn’t matter, and historic correlations are no longer relevant would be a grave mistake in our opinion. 

There is always reason to be bullish see Goldman Projects S&P500 to Hit 6500 in 2025, as well as reasons for serious concern such as the current state of the US Consumer which drives the economy and the “canary in the coal mine” of  Credit Card Delinquency Approaching Great Recession Peak. 

That reality is why trying to time the markets is so foolish and so risky … it’s also so unnecessary. The key is finding those areas of opportunity based on attractive valuations, building a plan to sustain you and your family over the time frame required for that valuation to be recognized and discipline to stick with them. 

As we like to say, it’s process not prediction that is the key to building wealth overtime. The good news is after the recent pain caused in many asset classes due to rates rising there are a number of really attractive asset classes to consider.  See Goldman Sachs – Landing on Bonds as well as Torston Slok of Apollo who noted “When the Fed was raising interest rates from March 2022 to September 2024, the amount of money in money market accounts increased $2 trillion as investors liked the higher level of yields, see chart below. So, what will happen with the money in money market accounts now that the Fed has started cutting interest rates? In other words, where will the $2 trillion added to money market accounts go now that the Fed is cutting? The most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment grade private credit.” 

If you, or someone you care about, ever wants to talk more about this in greater detail please reach out anytime. 

If you would like to read further on the Federal Reserve and their current dilemma, we’ve included a recent piece from one of our favorites Brian Wesbury below. 

Have a wonderful weekend! 

Tim and the team at TEN Capital 

Monday Morning Outlook

The Fed’s Challenge 
To view this article, Click Here. 
 
Brian S. Wesbury, Chief Economist 
Robert Stein, Deputy Chief Economist 
Date: 11/11/2024 
 

The Federal Reserve cut short-term rates by a quarter percentage point last week, like pretty much everyone expected.  In addition, the Fed didn’t push back hard against market expectations of another quarter-point cut in mid-December, so unless the economic or financial news changes dramatically by then, expect a repeat at the next meeting. 

It’s not hard to see why the Fed has been cutting rates.  The consumer price index is up 2.4% in the past year versus a 3.7% gain in the year-ending in September 2023.  Meanwhile, the PCE deflator, which the Fed uses for its official 2.0% inflation target, is only up 2.1% in the past year while it was up 3.4% in the year ending in September 2023. 

However, in spite of getting into the Red Zone versus inflation, the Fed isn’t yet in the End Zone, and it looks like progress has recently stalled.  According to the Atlanta Fed, the CPI is projected to be up 2.7% in the year ending this November while PCE prices should be up 2.5%. 

It’s also important to recognize that a few years ago the Fed itself devised a measure it called Supercore inflation, which excludes food, energy, all other goods, and housing.  That measure of prices is still up 4.3% versus a year ago, which is probably why the Fed has stopped talking about it. 

Moreover, it’s important to recognize that there’s a huge gulf between the policy implications of the Fed reaching its 2.0% inflation goal and the public’s perception of inflation no longer being a problem.  Right or wrong, for now, the public seems to think that for inflation to no longer be a problem prices would have to go back down to where they were pre-COVID. 

But that’s not going to happen.  The federal government spent like drunken sailors during COVID and the Fed helped accommodate that spending by allowing the M2 measure of the money supply to soar.  M2 is off the peak it hit in early 2022, but it would take a much greater reduction than so far experienced to restore prices as they were almost five years ago.       

Instead, getting to 2.0% inflation means eventually accepting not only that prices aren’t going back to where they were but they’re going to keep rising, albeit at a slower pace. 

And remember, even that goal has so far remained elusive.  The embers of inflation continue burning.  And since we have yet to see a significant or prolonged slowdown in growth, much less a recession, it remains to be seen whether inflation will reach 2.0% or less on a consistent basis. 

The bottom line is that the Fed’s inflation goal remains elusive.  In turn, that means don’t be surprised if the Fed pauses rate cuts early next year. 

Data, Just the Data

• U.S. Jobless Claims – initial unemployment claims fell by 6,000 last week to 213,000 for the lowest reading since April and below expectations. Continuing claims on the other hand rose to 1.908 million.  

• U.S. Existing Home Sales – rose 3.5% in October to a seasonally adjusted annualized rate of 3.96 million. This was a welcome bounce-back from September’s 14-year low.  

• U.S. Housing Starts – fell 6.9% in October to a seasonally adjusted annualized rate of 970,000. 30-year mortgage rates also slightly rose in October. 

• U.K. Retail Sales – fell -0.7% in October and worse than expectations of a 0.3% decline. Retailers across a range of industries suggested low consumer confidence and budget uncertainty.