BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Inflation is cooling, the economy has been resilient so far, and the Fed is done raising interest rates. Our last Insights was written near the year-to-date peak of interest rates, and stocks started to rebound about a week later. In the past four weeks, stocks gained over 5%.
The third quarter earnings reporting season went well, with earnings beats coming in at an above average rate. Q3 year-over-year earnings showed growth and were stronger than initially expected. Calendar year 2023 earnings are expected to grow just slightly compared to 2022. The long-term drivers of stock returns are earnings, dividends, and valuation changes, but valuations (the price-to-earnings, or P/E multiple, for example) cannot always increase. The year-to-date double-digit return from the S&P 500 has come mostly from higher valuations. Currently, earnings in 2024 are expected to grow more than 10%, and valuations are just above average. The dividend yield on the S&P 500 is about 1.5%. Over the past four weeks, large-cap stocks (S&P 500), mid-cap, small-cap, and international stocks all gained over 5%; Q4 into January has historically been a stronger-than-average period for stocks.
GDP for the third quarter came in much stronger than anticipated, with 4.9% real growth. New home sales in September were better than anticipated, despite higher mortgage rates, and durable goods orders were also higher than consensus. The monthly jobs report in early November was “just right” as far as Fed pressure goes; 150k jobs were added in October, below 180k expected. Unemployment ticked higher to 3.9%. Consumer inflation for October (CPI) was slightly less than expected, while Producer Price Inflation (PPI) improved compared to the prior month’s readings.
Yields fell, as bond prices rallied, after the Fed did not indicate another interest rate hike was coming. Further, the odds of any additional rate hikes all but evaporated after this week’s CPI (consumer inflation) report. Recently, 2-year Treasury yields were 4.84% (high closing mark 5.24%), 5-year Treasury yields were 4.43% (high closing mark 4.96%), and 10-year Treasury yields were 4.44% (high closing mark 4.99%). All the closing highs were in the past month.
Fed Chair Powell’s comments on November 1st suggested that the Fed was done raising rates. The Fed’s past rate increases, along with the continued shrinking of its $7.9 trillion portfolio, are expected to eventually slow the economy. As we mentioned last month, while the Fed is still expected to keep rates higher for longer, we feel that taking interest rates hikes off the table was a positive for risk assets like stocks.
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Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.