Investment Insights

 — Steve Orr 

Over seven

After a solid eight—week run, stocks have taken a needed seven—day break. This rally can be traced back further, to the August growth scare. That four—week episode was marked by war fears and the Crowdstrike breach. The major indices regained their footing only to be sidelined by a weak August jobs report just after Labor Day. The Fed’s half—percent rate cut in the Fed Funds target range brought out the animal spirits again. A 7% gain for the S&P 500 since the Fed’s September 18 meeting pushed the big index into overbought territory.

Earnings season this past seven trading days has occupied traders’ minds and with good reason. Taking away the mega-tech Magnificent 7, the remaining 493 companies in the S&P 500 are not expected to show much growth. One analysis we saw projected the 493’s earnings to have grown in the third quarter only -0.1%, or basically flat year—over—year. This week will set the tone for the rest of the earnings season as five of the Mag 7 turn in their report cards this week. Tuesday after the close Alphabet (Google) reports. Meta (grandma’s pictures on Facebook) and Microsoft headline Wednesday, with Amazon and Apple finishing after market close on Thursday. Should be quite a week. NVIDIA, last of the Mag 7, holds off until November 21.

Snap back

Also fresh on Wall Street minds is the recent rise in interest rates. Rewind back to the stock swoon from August. Yields for the 10-year Treasury had already dropped a half of a percent on weaker economic data. As the summer drew to a close, another round of weak data pulled rates another one-third of a point lower. Heading into the Fed’s rate announcement, the 10-year Treasury bottomed at 3.64%. Remember the Fed’s announced rationale in lowering rates was 1) inflation was near their 2% goal (in some ways) and 2) jobs were now more important.

Almost immediately after the Fed rate cut, economic data began to improve. Now, six weeks later, Treasury yields are back to early summer levels, with the two—year changing hands at a 4.13% yield and 10s at 4.26%. Note for both maturities, these levels are in the middle of their trading range the past two years. Upshot? Mortgages and car loans are roughly the same level they were in May.

Effects?

The deep South will be dealing with the effects of Helene and Milton for some time to come. We think they shaved two— to three—tenths off of third- quarter growth. This Wednesday the Bureau of Economic Analysis releases its first estimate of third—quarter GDP growth. Most analysts are penciling in 3%, which looks about right to us. There is a slew of other second- tier numbers this week, but the Street is waiting for Friday’s payroll report.

Unemployment in October should have held steady at 4.1%. Job creation is expected to have run at about half of last year’s 220,000 run rate. Estimates for payrolls center around that 110,000 level but have the widest high and low we can remember. Depending on effects of hurricanes, possible strike impacts on Boeing suppliers and the ILA walkout, the jobs number could range from -10,000 (Bloomberg) to 125,000 (Evercore ISI). Job openings, pending home sales and the Fed’s favorite inflation gauge, personal consumption expenditures, will show little change from September. Improving growth and steady readings from business surveys are encouraging, but we think the Fed will stay the course for two more quarter-point cuts this year. Of course, an upside surprise in the payroll report could change our opinion.

Next?

The next best news we are waiting for is the end of the election season. Then mercifully the TV ads will stop, and our mailbox will be empty. Cantor reports that in 16 of the past 17 cases when the S&P 500 had risen 17% or more by October, the fourth quarter went on to post positive returns. This month, tech has crawled back into the driver’s seat, thanks to decent results from Tesla and hopes for more AI excitement. The S&P 500 remains on track for a small gain, bettering its October election year average of -0.9%, according to the Stock Trader’s Almanac.

We find that most election years have a mixed bag for stock returns in the first 10 days after the election. Over the past 13 elections, seven have had negative returns for stocks up to a week later. Buy the rumor, sell the news. The primary trend remains upward over the intermediate term. For 2025 we do have our periscope up regarding earnings. Analysts are projecting 15% earnings growth in 2025, a high bar when GDP growth is wavering between 2% and 3%.

Headline valuations remain rich, at 21.7 times next year’s interesting earnings projections. Grabbing an envelope and pencil, we stripped out the Mag 7 and got a S&P 493 price earnings ratio of 19.8 times. Yardeni points out that is much closer to the four—quarter average P/E of the S&P 500 since 1964. Sentiment has turned decidedly bullish since the August growth scare and is just frothy enough to bring forward returns down into the single—digit zone for the big index.

Run in

A week out from the election, and this one feels “calmer.” We say that tongue in cheek because 2012 was Super Storm Sandy, 2016 the S&P 500 was on a nine-day drop bender and 2020 saw a second COVID wave grabbing headlines. Now all we have is Iran-Israel war, Red Sea shipping at a near standstill, Europe stagnating, China flirting with recession and taking Taiwan, Boeing strike...,—um, what did we leave out?

At least we have the World Series this week. Stocks score good runs in November. Since 1950, November scores #1 in performance for the S&P 500. The same holds for the large cap Russell 1000 and small cap 2000 since 1979. For all years, stocks return better than 1.5%. Bonds do not fair so well, averaging a 0.5% loss. Whatever the outcome of the election, here’s to stocks staying on their averages.