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WEEK AHEAD
October 7-11, 2024
As key economic indicators remain robust—underscored by this week’s strong labor market report—and market volatility stays largely in check, our technical signals continue to reinforce a fully invested stance. The alignment of solid fundamentals with steady momentum further validates a confident positioning in the current market environment.
The first week of October ushered in a subdued opening for equities, with the S&P 500 slipping a modest 0.17% month-to-date (MTD). Yet, beneath this ostensibly calm surface, the bond market took center stage as a steepening yield curve pushed the Bloomberg U.S. Aggregate Bond Index down by 1.0%.
The geopolitical flare-up in the Middle East, now extending to Lebanon, has notably failed to rattle markets. Oil prices have remained surprisingly composed, with WTI crude—a bellwether for U.S. oil—rising $6 to $74.45 per barrel. This stability partially reflects the U.S.’s dominance as the world’s largest oil producer, responsible for over 20% of global output, producing 13.4 million barrels per day and maintaining a net export position.
The utility sector quietly added another 69 basis points MTD, boasting as the best-performing sector with a year-to-date (YTD) gain of 32%. But the star performer of the month so far has been the energy sector, up 6% MTD, with ExxonMobil surging 6.5% on the back of rising energy prices.
However, the week’s real action was found in Treasuries, where the 10-year yield edged up to 3.98%, lifting long-term Treasuries by over 15 basis points. Despite a recent rate cut from the Federal Reserve, the yield curve steepened further, shaped by the Fed’s recalibrated messaging about the economy’s resilience and a strong jobs report. Unemployment ticked down to 4.1%, while nonfarm payrolls exceeded expectations, adding 254,000 jobs.
The upcoming week ahead will continue to monitor the state of the Middle East conflict and its impact on oil prices. As China’s market returns from the National Holiday, will China continue to push higher after gaining 35% following the government’s stimulus plans to boost bank lending and consumer spending? If Hong Kong is any yardstick, the Hang Seng Index gained over +10% last week. Last but not least, with the release of the monthly CPI and PPI for the state of inflation, the earnings season begins as some of the biggest banks begin to announce earnings: JP Morgan, Wells Fargo, and Bank of New York Mellon.
“Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019. The labor market is not a source of elevated inflationary pressures.” - Chair Powell’s FOMC Press Conference, September 18, 2024
Remember When a “Dollar Saved Was a Dollar Earned?”
The evidence shows that at this point, handwringing over large deficits hasn’t been the prediction of financial Armageddon. I’ll admit that this is quite the oversimplification of the complex history of the U.S. fiscal condition. One look at Jeremy Siegel’s long-term Total Real Return Indices and the performance of the U.S. dollar will give you a real understanding of the negative effects of inflation and the impact that deficits and debt have on inflation. That said, there is more than enough evidence that stocks have done quite well during periods of government fiscal mayhem. Let us not forget the most recent Covid period of double-digit trillions of deficit spending has been acutely good for stocks, particularly growth stocks that have risen over 40% over the past year.
Those who are historians of market performance shouldn’t be surprised, but in fact, most bouts of spending consciousness have come before dramatic downturns in the stock market, 1929 included.
In fact, how many of us remember the 1999-2000 market meltdown (many may be too young to remember), but 2000 was the last year that the government even came close to balancing the budget?
From 2000 to now, the debt has gone from roughly $6 trillion to $35 trillion. Yup, that’s right, 5-fold in 24 years. I can only look at the facts; the stock market has also had the greatest run in that period. I’m not an economist, but the GFC and recently COVID have affirmed that such stimulus leading to this debt was warranted if not required. But as Sherlock Holmes said, or so they say he said, “If the impossible is eliminated then however improbable must be the truth,” and so far, the truth is that deficits have been good for stocks. However, there is a truth yet to come: deficits can’t be good for our future generations, and fiscal growth will be able to raise all boats.
I wanted to note a chart showing government tax receipts, the other part of the deficit equation. The chart shows an uptick in tax revenues, and all evidence points to a continued increase. Going forward, there undoubtedly should be some support in tax revenues from increased capital gains taxes, given stock market performance. One can imagine the positive effect on tax revenues as the economy looks to have done a “touch and go” and GDP forecasts rise.
So, I leave you with an observation coming into the election. There seems to be no possibility or desire to cut the deficit, if not grow the deficit in the coming years…and that may be good for stocks.
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.