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WEEK AHEAD
November 4-8, 2024
Equity markets experienced a modest pullback this week, with gains temporarily stalling. Our technical indicators suggest a balanced outlook, indicating no significant shift in market dynamics at present. Our portfolio strategy remains fully invested, underscoring continued confidence in the market’s potential. Attention now turns to the upcoming FOMC guidance, which will be pivotal in shaping both investor sentiment and broader economic expectations in the weeks ahead.
Well, in the world of Wall Street, it’s not always smooth sailing, and this past week proved just that. Corporate earnings and rising bond yields joined forces to weigh down the markets, sending the S&P 500 to its second straight week of losses, dropping 1.35%. By the time October wrapped up, the index had shed 0.91% for the month.
Now, don’t get us wrong—there were some bright spots. Alphabet, aka Google, knocked it out of the park like World Series MVP Freddie Freeman, smashing earnings expectations by nearly 16% and posting $2.12 in earnings per share, up a staggering 37% from last year. But for the other tech giants—Apple, NVIDIA, Microsoft, and Meta—the story wasn’t quite so rosy. Despite exceeding earnings expectations, concerns over their forward guidance on capital expenditures cast a shadow. Investors got jittery, fearing that significant increases in capex and AI spending could squeeze profit margins.
Jobs data was a mixed bag, with the unemployment rate steady at 4.1%, but inflation remained stubborn. The Core PCE Price Index stayed flat from the previous month but still clocked in at a hotter-than-expected 2.7%. This dented some hopes for a Fed rate cut as we head into the upcoming FOMC meeting – the last FOMC dot-plot projects another half-percentage cut. As a result, bond yields crept higher, with the 10-year Treasury yield rising by 12 basis points to 4.37%. The bond market wasn’t immune to the pressure either, with the Bloomberg U.S. Aggregate Bond Index losing 0.61% for the week, bringing its monthly loss to 2.48%.
Looking ahead, corporate earnings from retail, energy, and industrial sectors will dominate the headlines, but all eyes will be on Tuesday’s election results and the highly anticipated FOMC meeting on Thursday. Investors will be hanging on every word to see how the Fed plans to navigate the economic landscape as we march toward 2025. Just because the market’s a little jittery because of the election doesn’t mean we’re sinking. Sometimes you’ve got to weather a few storms to reach the sunny shores ahead!
“We don’t have deficits because people are taxed too little. We have deficits because big government spends too much.” – President Ronald Reagan, State of the Union, January 27, 1987
Chickens, I Mean “Deficits” Coming Home to Roost
An election is on the horizon, and its consequences will be hard to ignore. In the 1980 election, Republican nominee Ronald Reagan defeated incumbent Democratic President Jimmy Carter, resulting in 12 years of continuous Republican presidency, producing a change in economic policies and a much more favorable environment for stocks. From January of 1965 through December of 1981, the annual S&P 500 price return was 2.2%. From January of 1982 through June of 2024, the annualized S&P 500 price return was 9.4%. The first period was a 17-year bear market. During Reagan’s eight years, the annualized price return was 11.4%. The second period was a 42 ½ year bull market. In the first period, four presidents, Johnson, Nixon, Ford, and Carter, presided over the bear market. In the bull market period, there were seven presidents: Reagan, Bush Sr., Clinton, Bush, Obama, Trump, and Biden. Presidents from both parties held office in the bear and bull markets. In the first period, the annual inflation rate rose from 1.6% to 10.3%, averaging 7.0%. In the second period, inflation fell from 10.3% to 3.2%, averaging 2.9%. In the first period, tax rates and regulations increased. In the second, tax rates remained low, and on average, regulations were less aggressive than in the first period. Ronald Reagan’s economic policies were the foundation for the bull market, while Johnson’s and Nixon’s policies sustained the bear market.
The transition from bear market to bull market was not difficult to anticipate in the context of the right model; stock market returns are higher when inflation is low or falling, tax rates are low or declining, inflation is falling, and regulations are not increasing. If these conditions exist, real economic growth will be at or above its long-term average, and profits will increase. Laffer and Canto predicted the lengthy bull market in the fall of 1980 in a piece written for their clients. Using another metric, the DJIA, the S&P 500 did not exist as it does today, bounced between 500 and 1000 for almost 20 years.
Large-cap growth stocks will be favored in an economic environment similar to the last 42 ½ years. Small-cap and value stocks will be favored when regulations and tax rates are increasing, and inflation is rising. Regulators regulate big companies. Now, they are focusing on Google and other large tech companies that have become the target of antitrust investigations, much as IBM and Xerox were in the late 1960s and 1970s.
The candidates in 2024 have advanced very different economic policies. The Democrats want to raise tax rates and regulations for corporations and the rich, while the Republicans favor lower corporate tax rates and extending Trump’s 2017 tax provisions. The different policies will produce very different economic environments and stock market returns. In the last 60 years, raising tax rates has produced a change in leadership on occasion. Bush Sr. raised tax rates and lost to Clinton in 1992. Clinton raised tax rates in 1993, and in 1994, the Republicans took control of the Senate and the House for the first time in 40 years. Obama raised tax rates, and in 2010, Democrats lost control of the House and the Senate. We can only hope at this point.
Irrespective of who is elected, the growing Federal budget deficit will present an uncomfortable reality. The principal drivers of the deficit are Military, Social Security, and Medicare spending. Neither candidate has shown any interest in reducing the deficit. The long-awaited Fed’s response to the Treasury’s need for liquidity may override any other economic policy changes.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.