This Week's "Noise"
Election fears continue to dominate headlines. No matter what happens, remember: "hating the government is not an investment philosophy."
Treasury yields are back comfortably over 4% on the 10-yr at roughly 4.3% for the first time since July, signaling a high likelihood of a soft/no-landing scenario. Look to next Thursday's FOMC meeting after the election for more guidance on further short-rate moves.
The next few weeks will also represent the peak of Q3 earning numbers being published. So far, ~37% of S&P 500 companies have reported, nearly 75% of those beating consensus Earning Per Share (EPS) expectations on an average of 5.7%. (FactSet Earning Insight report) 40% of the S&P market cap will report this week.
Current Market Outlook (6 to 12 months)
Market
The stock market has had an excellent run and is getting expensive. We expect a pullback of 5 to 7% in the near term. Long-term, we remain bullish.
A key theme we have mentioned several times in person and on our Thursday calls is how these concentrations from the largest (by market cap) companies will inevitably violate SEC, FINRA, and IRS guidelines. The S&P and Russell investment index providers have both organizations proposed changes to the methodologies in index calculation to align with the Investment Company Act of 1940 and the Federal Internal Revenue Code. Since September, we have seen the rest of the non-Mag Seven stocks catch up in performance (CNBC).
Economic
The 10-year Treasury yield is up 65bps (0.65%) since the September lows. A steepening of the curve would suggest the broader bond market is expecting growth in the future. Such moves reaffirm the expectations of a soft landing scenario.
This year, we expect the trendline growth rate to be close to 2.5% GDP growth, and consensus estimates expect next year's growth rate to be closer to 1.8% year over year (FactSet). A handful of major factors typically cause recessions: Black Swan events (ex, the COVID-19 pandemic), hawkish Federal Reserve policy (rapidly rising Fed funds rates), a commodity spike (particularly in energy/oil), or lastly, extreme valuation unwinding.
No one can predict black swan events; however, for the 3 remaining typical recession drivers, only one (extreme valuations) can be said to be somewhat unfavorable.
Long-Term View (4 to 7 years)
In the long term, we believe the US economy will continue to outperform other world economies. This is supported by a combination of re-shoring manufacturing, new investments resulting from the Inflation Reduction Act, US energy independence, and higher productivity due to implementing Artificial Intelligence (AI) software/systems.
Due to the strong 2024 returns (+24% for the S&P 500), we are adjusting our longer-term outlook for the US stock market accordingly (FactSet). We believe the S&P 500 index should be 7,000 to 8,000 by the end of 2028. This represents an approximately 20% to 40% return from the current level.
Bonds have re-emerged as an important part of asset allocation as yields have risen. We expect a diversified bond portfolio to produce returns 3% to 5% above inflation for the next 5 to 7 years.
We currently estimate that the net worth of American households rose by $2.8 trillion in the third quarter to a record $157.2 trillion, or roughly $446,000 per head. Total net worth is up 11% over the past year and 47%, (or a staggering $50.1 trillion), over the past five years, easily outpacing an estimated 23% increase in consumer prices and a 35% increase in personal income over the same period.
This wealth surge has come from both stocks and housing (Dr. David Kelly, JPMorgan Asset Management, September 30, 2024).
“Things that have never happened before happen all the time.”
- Morgan Housel, The Psychology of Money
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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Any opinions are those of John O’Hare II and not necessarily those of Steward Partners. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
Asset Allocation and diversification do not assure a profit or protect against loss in declining financial markets.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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