Investment Commentary – October 14, 2024

Equities

The S&P 500 returned 1.1% for the week and ended at a new all-time high. After choppy trading amid concerns that the strength of the economy may slow the pace of rate cuts, markets moved higher on Friday on the back of strong earnings from the major banks. The technology (+2.5%) and industrials (+2.1%) sectors were the best performing in the S&P 500; utilities (-2.5%) and communication services (-1.3%) were the laggards. EAFE markets returned 0.3% with Europe (+0.5%) leading. EM markets returned -1.7% as China, after some record-setting weeks, fell 7% amid concerns that even the announced stimulus measures may not be enough. 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 +1.2. For the next 12 months, EPS growth for the S&P 500 is expected to be 9.4% (vs. 7.2% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 17.2% (vs. 12.7% 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 moved higher across the curve. Municipals returned -0.6%, while US AGG returned -0.5% and US IG returned -0.4%. HY bonds returned -0.3% as the spread widened 10bps while bank loans returned 0.3%. EM debt returned 0.1% as the US dollar rose 0.4%.

Rates

Rates continued to rise across the curve as economic data showed a strong economy and stickier inflation. The recession-watch 3M-10Y spread compressed 12ps and closed the week at -54. The 2Y-10Y spread compressed 10bps and is now +14. Rates rose in other developed economies as well. The BTP-Bund spread is at 1.30%. 5-year and 10-year breakeven inflation expectations rose and now sit at 2.28% and 2.33% respectively; the 10Y real yield rose 3bps to 1.77%. 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 rose 0.4%. The commodities complex rose 0.3% as energy prices rose 0.9% for the week. Brent prices rose to $79/bbl. US natural gas prices fell 7.8% as hurricane Helene-related disruptions abated while European gas fell 0.3%.

Market monitors

Volatility rose for equities and bonds (VIX = 20, MOVE = 118); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) rose from 18 to 28 as investors remained bullish