Exceeding Market Objectives

November 2023 - We hope everyone had a restful and enjoyable Thanksgiving holiday weekend. We truly have a lot to be thankful for, and it becomes more evident each time we pause to look around us to see how so much of the world lives compared to the standard of living in the U.S.

With earnings season for the third quarter completed, we are in the final quarter of the year. Even though targets had been lowered given the status of the economy, over 80% of companies composing the S&P 500 met or exceeded market objectives. This was largely in part because of strong consumer spending even in the face of high interest rates and higher prices. In fact, data shows that more consumers are drawing down savings and retirement funds to support spending than in the past two years. Black Friday sales were stronger than forecast, with estimated sales up 7.5% reported by Adobe. Even the MasterCard estimate was an increase of 2.5%, which includes in-store sales as well as online sales.

The stock market has been responding positively to the lack of interest rate increases since July, and the hope that rates won’t go any higher. Also, the mood is for a “soft landing” and no recession in the next year. In fact, the odds of a recession have decreased from 35% likelihood down to 20%. The S&P 500 was up 8.7% in the last month and is above 4500.

The tech sector continues to be strong, and AI (Artificial Intelligence) is the new economic stimulus. The predictions for AI continue to fuel speculation on how much it will change the corporate landscape, and how the negatives have not been fully investigated to see how much governance will be required to protect consumers. AI will transform our world in many ways, from how many jobs are performed to real estate values in areas that allow even more jobs to be done remotely from home.

The financial markets are treading water this week, waiting on inflation data on Thursday, the 30th, and then the FED meeting December 12-13. This information will largely determine the direction of the markets for the remainder of the year. Most of the European Central Banks have not jumped to conclude interest rates won’t need to be raised further. UK and Australian policymakers have spoken recently to indicate they may need further hikes to slow inflation.

The financial situation in China is getting a lot of attention in its efforts to support its real estate market and real estate loan business. For the first time, real estate developer stocks have been lifted due to expected measures that will allow banks to offer unsecured loans for development projects. China has millions of homes under construction, and wants to ensure their completion, even if it raises the risks for lending banks.

Africa’s largest economies are still struggling with high inflation and will most likely have to continue to raise rates.

The big story on the news this week is the release of hostages by Hamas. President Biden said the cease fire agreement was going well and was the “result of extensive American diplomacy”. So far, Vladimir Putin has been the only clear winner in the Israel-Hamas war. It is unclear how far the U.S. European Union can go funding both the invasion of Gaza and the Russian aggression in Ukraine. The U. S. has been spread thin with these two conflicts, and any action by Iran against the U.S. in Gaza or by China in Taiwan will certainly test our resources.

In the fixed income segment of the market, we are at a turning point in bond prices vs bond yields. The hinting and suggestions from many sources that the rise in interest rates is over has lowered bond yields in the past 10 days. This lowering of yields from the perceived high will continue once new data from the FED is analyzed and commented on later this week. So, after waiting for yields to peak and offer higher cash flows than we have seen in decades, the time has come to lock in those yields. We will be updating fixed income allocations over the next few days to take advantage of current yields and pricing.

Once the FED makes clear its intentions on interest rate policy and we do have an inflation rate path they are comfortable with, the stock market should respond very positively. Whether or not we see a Santa Claus rally or not depends on the FED’s comments this week and in mid-December. However, we are close to a call for a rate peak and looking for the next move to be a rate decrease in 2024.

Thank you for the trust you have placed in us. Your trust is our most valuable asset. Please contact us if you have any questions or would like to reassess your risk tolerance. We look forward to visiting with you and wish you a blessed Christmas Season.