Investment Commentary – November 25, 2024

Equities

The S&P 500 returned 1.7% for the week as the market shrugged off lackluster guidance from bellwether Nvidia and put their faith in the upcoming administration’s economic and deregulation agenda. The rally broadened beyond large-cap tech as the S&P Equal Weight index gained 2.6%, and small cap stocks rose 4.5%. Consumer staples (+3.1%) and materials (+3.0%) were the best performing sectors in the S&P 500; communication services (-0.3%) was the only sector in the red. EAFE markets returned 0.0% with gains in the U.K. (+2.6%) offset by losses in Japan (-1.8%). EM markets returned 0.2%, with gains in Korea (+3.4%) offset by losses in China (-1.8%). From a valuation perspective, most markets are within ±1 standard deviation based on historical forward P/E ratios, though the S&P 500 is at +2.1 and the NASDAQ is at +1.4. For the next 12 months, EPS growth for S&P 500 is expected to be 10.4% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 19.1% (vs. 10.4% annualized over the last 20 years). All US indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), and the Russell 2000 (US Small Cap) trade at or above their 20-year averages based on forward P/E ratios while the MSCI EAFE (NonUS Developed Market Equities) and MSCI EM (EM Equities) are inline.

Fixed Income

Investment grade fixed income sectors posted positive returns as rates fell at the long end of the curve. Municipals returned 0.2%, US AGG returned 0.2%, and US IG returned 0.1%. HY bonds returned 0.3% while bank loans returned 0.2%. EM debt returned 0.6% as the US dollar rose 0.8%.

Rates

Rates edged lower at the long end of the curve and rose at the short end. The recession-watch 3M-10Y spread widened 8bps and closed the week at -15. The 2Y-10Y spread compressed 11bps to +2. Rates were mixed in other developed markets, falling slightly in Europe and the U.K. and rising in Japan. The BTP-Bund spread is at 1.26%. 5-year breakeven inflation expectations rose 4bps and now sit at 2.44% (peak on Nov 6 of 2.44% vs low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 1bp and now sit at 2.35% (peak on Nov 6 of 2.40% vs recent low of 2.03% on Sept 10); the 10Y real yield fell 6bps to 2.05%. The market now expects the Fed to cut once more in 2024 and three times in 2025 vs the Fed’s guidance of four cuts in 2025. At year-end 2025, the market expects the Fed Funds rate to be 3.8% vs. the Fed’s guidance of 3.25%-3.5%.

Currencies/Commodities

The dollar rose 0.8% to its highest level in two years. The commodities complex rose 3.9% as energy prices gained 5.7% for the week. Brent prices rose to $75/bbl. US natural gas prices rose 10.8% while European gas rose 0.2%, both on expectations of cooler weather.

Market monitors

Volatility fell for equities and for bonds (VIX = 15, MOVE = 99); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) fell to 8 from 22 and remains optimistic post-elections.