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Monthly Economic and Investment Outlook

November 2024 Economic and Investment Outlook

United States

stock market bull statue
  • Month-to-month changes in the employment data are volatile, and October’s report was likely amplified by hurricane effects, ongoing strikes, and other exogenous events that are expected to be temporary. Broadly speaking, the underlying labor market conditions appear to be slowing.
  • The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated just 12k new jobs in October. Government payrolls increased 40k in October, while private payrolls contracted 28k. Manufacturing payrolls fell 46k, reflecting the strikes at Boeing and Textron. The unemployment rate held steady at 4.1%. Average hourly earnings growth was solid, 4.0% y/y compared to 3.9% in September.
  • The Bureau of Labor Statistics (BLS) reported that job openings fell 5.3% to 7.44M in September, the fewest since January 2021. The decline in openings was concentrated in the South, likely driven by hurricane Helene. The decline in job openings pushed the ratio of job openings to unemployed workers down to 1.09 from 1.10.

    US Number of job openings 
    Source: Oxford Economics/Haver Analytics

     

  • September’s headline Personal Consumption Expenditures (PCE) price index dropped to 2.1% y/y from 2.3% y/y in August. Core PCE, which excludes volatile food and energy costs, remained unchanged at 2.7%, compared to the previous month.
  • The Employment Cost Index (ECI), which tracks the change in wages and benefits for all workers in the private and public sectors fell to 3.9% y/y in September, the smallest increase in three years. This is down from 4.1% in June and evidence of labor costs easing.


    US Employment Cost Index
         
    Source: Oxford Economics/Haver Analytics

  • The Conference Board’s Consumer Confidence index spiked 9.5 points to 108.7 in October, the biggest jump in 3½ years, and the highest reading since January 2024. The present situation index improved from its lowest level reached in early 2021. The expectations index reached its highest level in nearly three years.
  • According to the advance estimate from the Bureau of Economic Analysis (BEA), U.S. Gross Domestic Product (GDP) expanded in Q3 at a 2.8% annualized rate, just below the 3.0% growth in Q2. Solid growth with easing inflation is good news. Growth was driven by both consumer and federal government spending. Nominal GDP growth slowed to 4.7% from 5.6% in Q2.

Global

  • The International Monetary Fund’s (IMF) October World Economic Outlook expects global growth to remain stable yet underwhelming. At 3.2% in 2024 and 2025, the growth projection is virtually unchanged from the July and April 2024 World Economic Outlooks.
  • The IMF’s U.S. growth outlook improved for 2024 and 2025, while the Chinese outlook weakened for 2024. The U.S. growth forecast was raised to 2.8% from 2.6% in July, while the 2025 growth forecast was raised to 2.2% from 1.9%. China’s 2024 growth forecast was lowered to 4.8% from 5%, while the 2025 growth forecast remained unchanged at 4.5%.
  • Inflation in the Eurozone, the 20 countries sharing the euro currency, rose 2.0% y/y in October, up from 1.7% in September. The increase was primarily driven by higher food and energy costs. Core inflation held steady at 2.7% y/y, compared to the previous month.
  • The Eurozone’s October composite PMI (including both manufacturing and services PMIs) rose a meagre 0.1 percentage points to 49.7%, from 49.6% the previous month, but is still in contraction territory. The manufacturing sector gained some traction while the services sector index fell slightly. Employment fell for the 3rd month in a row, at the fastest pace since 2020, mostly in the manufacturing sector.

    Eurozone PMI
    Source: Oxford Economics/S&P Global

          

  • According to Eurostat, the statistical office of the European Union, seasonally adjusted GDP increased by 0.9% y/y in Q3, led by strength in Spain and Ireland. The Eurozone’s largest economy, Germany, surprised many posting growth of 0.2% in Q3, avoiding a recession that had been largely forecast. Germany continues to struggle with a downtown in its key manufacturing sector.
  • A Reuters poll suggests that the U.S. dollar will hold on to its recent strength over coming months on robust domestic economic data and continued scaling back of bets for Federal Reserve interest rate cuts. The 4% rally in the U.S. dollar in October was primarily due to strong consumer spending and labor data.

    Marketwatch
    MarketWatch     

                   

  • Persistent U.S. economic outperformance has pushed financial markets to price in a higher year-end fed funds rate than thought even one month ago. A separate Reuters survey of economists predicts two more quarter-point rate reductions this year.
  • Based on interest rate differentials, the U.S. dollar’s recent momentum seems unlikely to fade as we enter 2025. Fed peers, such as the European Central Bank (ECB), appear more likely to be aggressive in near-term rate reductions.

Fixed Income

  • The 10-year U.S. Treasury yield has risen almost 80 basis points (bps) to 4.39% since the Federal Open Market Committee’s meeting in September. Bond investors may be suggesting the Fed’s rate cut was premature as the economy is relatively strong.

     
    Stifel Nicolaus and Co
    Stifel Nicolaus & Co
         

  • Yardeni Research postulates that the bond market may be voting against Washington, figuring that no matter which party wins the White House and the Congress, fiscal policies will increase the bloated Federal government budget deficit and heat up inflation. Net interest outlays are approaching $1 trillion on the ballooning federal debt.

    US Federal Gov Outlaws 

  • Since the Fed lowered the federal funds rate target range for the first time since 2020 by 50 basis points (bps) to 4.75% to 5.00% in September, mortgage rates have increased. The 30-year mortgage rate is currently around 6.75%, lower than the 7.22% reached in May, but well off the 6.09% low hit in late September. The Federal Reserve controls short-term rates but not long-term yields, which are primarily determined by the financial markets.

    Freddie Mac 

    Source: Fredie Mac       fred.stlouisfed.org

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as fixed income markets digest recent economic data and focus on U.S. budget deficits, net bond issuance, and increasing interest expense on outstanding U.S. debt.
  • Slight overweight to short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.

Equity Market

  • A market strategist from Goldman Sachs projects that the next 10 years for the S&P 500 may be a “lost decade”, with a mere 3% annual return. The strategist notes that because forecasting the future is difficult, the range for his prognostication is anywhere from -1% to 7% annually. The projection was made by examining the S&P 500’s current valuation and concentration, effect of interest rates, corporate profitability, and various macro fundamentals. One major assumption is that valuations in the future will be lower than today’s level of valuation.
  • Yardeni Research counters that even without expanding valuation multiples, earnings growth would likely boost the S&P 500 price index at a pace that is at least twice Goldman’s projection, and returns would be more like 11% a year, including reinvested dividends.
  • Yardeni notes that the longer-term average gain of the S&P 500 stock price index (excluding dividends) has been around 6% per year. That has been the same as the longer-run average of the annual growth rate of the S&P 500 reported earnings per share. He points out there is no reason to expect earnings to grow less than 6% per year on average over the next 10 years.

          
    SP 500 Reported Earnings
              

  • In fairness to Goldman, Yardeni points out that a lost decade for stocks is not unprecedented. The S&P 500 was basically flat 10 years after it peaked at a record high during April 2000. However, that is largely attributable to the Great Financial Crisis. By April 2013, the S&P 500 was back at a new high and has nearly quadrupled since then.



    Macrotrends

    macrotrends

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by a stronger U.S. Dollar and slower economic growth.
  • Slight exposure to gold to serve as a hedge, in a geopolitically tense global environment, and strong central bank buying.
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