This Week's "Noise"
Election fears continue to dominate headlines. As of this writing (Election Day), we do not know the outcome of the race.
ISM Services index came in at 56.0, well above consensus exceptions of 53.8, signaling strong growth (FactSet).
Treasury yields have moved quickly in the past six weeks, with the 10-year at roughly 4.35% for the first time since July. This signals the market expecting a “soft” leaning toward a “no-landing” scenario and strong economic growth. Look to this Thursday's FOMC meeting after the election for what is expected to be a 25bps (0.25%) Fed rate cut.
Q3 earnings numbers are coming in fast. Quarter to date, ~70% of S&P 500 companies have reported, nearly 75% of those beating consensus Earning Per Share (EPS) expectations by an average of 4.6% (FactSet Earning Insight report).
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.
Economic
A handful of significant factors typically cause recessions: Black Swan events (for example, the COVID-19 pandemic), hawkish Federal Reserve policy (rapidly rising Fed funds rates), a commodity spike (particularly in energy/oil currently in the low $70s), or lastly, extreme valuation unwinding.
No one can predict black swan events; however, for the 3 remaining typical recession drivers, only one (extreme valuations) seems in the mix.
A strong rise in the 10-year Treasury implies the market is expecting strong growth. If this is the case, expect further downward pressure on inflation to be stunted.
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.
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