Investment Commentary – November 4, 2024

Equities

The S&P 500 returned -1.4% amid mixed earnings announcements from technology bellwethers and a continued rise in interest rates. Communication services (+1.5%) and consumer discretionary (+0.5%) were the only sectors in the S&P 500 to eke out positive returns; technology (-3.3%) and real estate (-3.1%) were the laggards. EAFE markets returned -1.0%, with Europe (-1.4%) dragging on returns. EM markets returned -1.0%, dragged down by Brazil (-3.8%) and Korea (-1.0%). 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 +2.0 and the NASDAQ is at +1.3. For the next 12 months, EPS growth for the S&P 500 is expected to be 7.5% (vs. 7.5% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 16.6% (vs. 12.1% annualized over the last 20 years). All major world indices, including the S&P 500 (US Large Cap), NASDAQ, Russell Midcap (US Midcap), Russell 2000 (US Small Cap), MSCI EAFE (Non-US Developed Market Equities), and MSCI EM (EM Equities) trade at or above their 20-year averages based on forward P/E ratios.

Fixed Income

Investment-grade fixed-income sectors were negative as rates spiked higher across the curve. Municipals returned -0.1%. US AGG returned -0.6%, and US IG returned -0.7%. HY bonds and bank loans returned 0.0%. EM debt returned -0.1% as the US dollar was flat.

Rates

Rates spiked higher across the curve amid strong economic data and as traders continued to pare back expectations of aggressive Fed cutting. The recession-watch 3M-10Y spread compressed 27ps and closed the week at -15. The 2Y-10Y spread widened by 4 bps to +17. Rates rose in other developed economies as well other than in Japan. The BTP-Bund spread is at 1.24%. 5-year and 10-year breakeven inflation expectations rose and now sit at 2.38% and 2.34%, respectively; the 10Y real yield rose 10bps to 2.05%. The market now expects the Fed to cut between one and two times vs the Fed’s guidance of two cuts. At year-end 2024, the market expects the Fed Funds rate to be 4.4%.

Currencies/Commodities

The dollar was flat. The commodities complex fell 2.0% as energy prices fell 3.4% for the week. Brent prices fell to $73/bbl. US natural gas prices rose 4.0% on expectations of colder weather, while European gas fell 9.7% as lower wind production increased reliance on gas-fired power plants.

Market monitors

Volatility rose for equities and bonds (VIX = 22, MOVE = 133); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) rose slightly to 9 from 8 and remains bullish.            

Disclosures

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