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Perspectives

Will it be a Hard Landing, a Soft Landing, a Bumpy Landing, or No Landing?

by Fortem Financial October 7, 2024

While 2Q24 was characterized by narrow market leadership and a hawkish repricing of Fed rate-cut expectations, 3Q saw solid performance from a wider spectrum of companies and increasing expectations for rate cuts in 2024. Please see our 3Q Review below for additional insight...

 

3Q Review

U.S. equities rose again in Q3 for the fourth consecutive quarter (S&P 500 +5.5%. NASDAQ +2.6%, and Russell 2000 +8.9%). The S&P 500 hit all-time highs in mid-July but slid in early August, rallying steadily for much of the rest of the quarter and finishing not far from new record levels. The equal-weight S&P 500 (+9.1%) fared better than the cap-weighted index, as some megacaps pared strong year-to-date gains.

While 2Q24 was characterized by narrow market leadership and a hawkish repricing of Fed rate-cut expectations, 3Q saw a solid performance from a wider spectrum of companies and increasing expectations for rate cuts in 2024. Behind this shift was a firming of expectations for an economic soft landing and a distinctly dovish Fed pivot that has the market now looking for -100 bp in total Fed policy easing this year. There was a lot of concern on the jobs front after July nonfarm payrolls printed well below consensus, while the rising unemployment rate triggered the recession-forecasting Sahm Rule.

S&P 500 companies saw 11.3% y/y earnings growth for 2Q, the highest level since 4Q21. Analysts are expecting S&P 3Q earnings to remain positive but only at a 4.3% y/y pace. The bull case remains founded on the Fed’s continuing to ease, disinflation traction, a stable (if slowing) labor market, still-healthy consumer spending, continued earnings growth prospects, and the ongoing Al secular growth theme. Bears are focused on a weakening world economy, valuations remaining extremely high, consumer confidence fraying, and some worries about when the trend might flip from slower hiring to outright downsizing. The best sectors were Utilities (+18.5%), Real Estate (+16.3%), and Industrials (+11.2%); the worst sectors were Energy (-3.1%), Communication Services (+1.4%), and Technology (+1.4%).

Recent developments

  • The Fed's 50 bp rate cut has modestly increased the odds of a soft landing. However, our mainline scenario remains a significant economic slowdown or mild recession.
  • Labor market conditions continue to deteriorate and credit growth remains weak. That underscores that monetary policy is tight and will remain so for a time even as the Fed cuts rates.
  • The Fed has modestly raised the odds that disinflation will end or that inflation will, in fact, reaccelerate.
  • The end of disinflation or the reacceleration of inflation would probably prove to be problematic for financial markets.
  • China's policymakers have instituted significant measures to fight impending deflation.

Conclusion

Our market assessment remains "a high-risk momentum-driven bull market," implying investors need to participate but also need to be extra judicious in equity selection, focusing primarily on earnings quality, earnings persistence, and strong free cash flow.

 

The Wall of Worry The Offsetting Positives

1. Labor market deterioration.

2. Falling consumer confidence.

3. Falling consumer savings / rising consumer debt.

4. Yield curve normalizing after long inversion (often the sign of a recession).

5. Too-high earnings growth expectations (+10% in 2024; +15% in 2025; +12% in 2026).

6. High valuation levels.

7. Massive and rising federal debt / interest expense levels.

8. Very close election.

9. Rising geopolitical tensions.

10. Threat of trade wars.

1. Decline in inflation. 

2. Central banks lowering rates.

3. Still good economic growth.

4. Strong earnings growth expectations.

5. AI / Productivity.

Source: Bob Doll, Crossmark Investment CEO

 

Market and Index Changes for the Week Ending 10/4/2024

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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