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WEEK AHEAD
October 14-18, 2024
As equity markets continue to climb, our momentum signal continues to strengthen. With no major surprises on the economic indicators, our signals remain in a fully invested stance.
Investor confidence in the resilience of the U.S. economy continues, and the recent CPI reading of 2.4% year-over-year is a figure that continues to surprise the bond markets. Bond yields widened by 10 basis points across long-term maturities, as Bloomberg's U.S. Aggregate Bond Index and U.S. Treasuries fell by 46 and 170 basis points, respectively.
In the energy sector, WTI crude prices remained steady at $75.49 per barrel, showing stability even as broader geopolitical concerns mount. On the labor front, weekly jobless claims surged by 33,000 to 254,000, surpassing consensus estimates and lending credence to the Fed's assessment that the labor market is not a major source of inflationary pressure. Nevertheless, inflationary trends remain mixed. While headline inflation continues to moderate, persistent price increases in food and insurance loom as potential concerns, compounded by the economic disruption caused by back-to-back hurricanes, Milton and Helene.
Looking ahead, market sentiment will increasingly hinge on upcoming earnings reports as banks and industrial sectors begin to weigh in. With just 21 days until the 2024 presidential election and 23 days before the next FOMC meeting, the intersection of politics and economic policy is taking center stage. Both presidential candidates have indicated support for new tariffs on China, regardless of the election outcome. This move could reignite inflationary fears and reshape the economic outlook in the months ahead.
"When governments get too involved in trade, economic costs increase and political disputes multiply. Peace is threatened. In the 1930's, the world experienced an ugly specter — protectionism and trade wars and, eventually, real wars and unprecedented suffering and loss of life."
– President Reagan, Radio Address, November 20, 1982
Stagecoach rides again!
Much has changed over the last month in the markets, and as the earnings season starts, we may see another sign of this change. The FED signaled a change that might be viewed as the "mission accomplished" football spike. We saw a rally in the stock price from what looks like lower lows to now busting through all-time highs before the Wells Fargo earnings announcement.
Wells Fargo Bank (WFC) reported that earnings beat over 18% expectations, $1.52 vs $1.28. This report also included $0.10 of losses recognized on the repositioning of debt securities in their portfolio, so the beat was even higher. Revenue was down from a year ago, with net interest income also down, but noninterest income was up. Despite the recent move, WFC trades at a Forward P/E of 11x. A growing economy and reasonable interest rates could bode well for the markets, as financials have been the laggard during the current market rally. For Wells, lower rates have been good for mortgage loan originations, and strength in the stock market has led to a 5% yoy increase in wealth and investment management fees. Many other parts of banking, like commercial and consumer, were flat from the previous quarter, which leaves some upside in the recovery and lower rate environment.
In the coming week, we'll see some other bellwether reports next week, such as Goldman Sachs, Morgan Stanley, and Discover Financial. We still think value matters, and currently, the S&P 500 Financial sector trades at the second-lowest Forward P/E (FPE) among all sectors at around 16x. Only one sector is cheaper at 14x, and that is Energy. Overall, the S&P 500 trades at an FPE of 21x, with Technology at 29x FPE. It might be a good time to trade-in that Tesla for a Stagecoach, a company founded in 1852!
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.