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Perspectives

Will Sticky Inflation and a Weakening Labor Market Eventually Trouble Equities?

by Fortem Financial October 14, 2024

U.S. equities rose for the fifth week in a row (S&P 500 +1.13%) closing at an all-time high. Banks were strong as Friday earnings boosted the stocks. Treasuries were weaker (the 10-year yield is up 35 basis points [bps] over the past eight sessions.) Best sectors were technology (+2.51%) and industrials (+2.11%); worst sectors were utilities (-2.55%) and communication services (-1.28%).

 

Key takeaways:

 

  1. Core CPI was +0.3% (above consensus of 0.2%). Headline CPI was +0.2% (above consensus 0.1%). Annualized core and headline inflation numbers are 3.3% and 2.4%, respectively. While inflation remains lower than it was over the last couple of years, it is still not down to the Fed's 2% target and unlikely to get there absent a recession.
  2. Initial unemployment claims jumped to 258,000 (vs. 230,000 expected). The upside was likely driven by Hurricane Helene. This result and the less-good-than-expected inflation number highlighted the Fed's dilemma of continuing to fight inflation while also dealing with less-good employment reports.
  3. The quit rate declined, consistent with rising unemployment and slowing wages. ISM Manufacturing came in weak with the employment component down.
  4. September's 50 bp rate cut was at least partly about mitigating downside growth. The rate cuts we are likely to see into year-end are about activity slowing down and about underlying inflationary pressures moderating. (We expect two more 25 bp cuts this year.)
  5. Annual government data revisions resulted in a significant upward revision in GDP growth since Q2 2020. Revisions also show that the savings rate has been on an uptrend since its 2022 trough, reaching 5.2% in Q2, against previous measures showing a steady downtrend since the beginning of 2023. These revisions are material. A higher savings rate would imply that households have more consumption dry powder than previously believed.
  6. Consensus earnings growth expectations for Q3 at the beginning of the quarter were +7.3% and at the end of the quarter were 3.2%. The 3Q earnings reports have just begun.
  7. Historically, value outperforms growth when the 10-year Treasury yield is above 4%. The P/E ratio of the top 10 stocks is 30.5x vs. the remaining 490 trading at 18.4x.
  8. In the nearly 100 years since the creation of the S&P 500, the 10 best Jan. 1-Sept 30 performance years were followed by three up and seven down October. Average performance was -2.6%.
  9. S&P 500 by quartile breakdown is as follows: Q1 (smallest), Q2, Q3, Q4 (largest); P/E ratio: 14.2, 16.9, 21.0, 23.01 YTD performance: -5%, +8%, +13%, +18%.
  10. With high valuations and high profit margins, the prospect for above-average equity returns has diminished. That likely favors dividend and dividend growth strategies.

Source: Bob Doll, Crossmark CEO

 

Market and Index Changes for the Week Ending 10/11/2024

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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