Market Update – October 21st, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Financial Markets

Last week, markets saw continued positive momentum, with retail sales exceeding expectations and earnings season picking up pace. By Friday, October 18th, the Dow Jones Industrial Average led the major indexes, gaining 0.97%, followed by the S&P 500, which rose 0.87%, and the Nasdaq Composite, up 0.78%. On the other hand, bonds were nearly flat, with the AGG edging up a slight 0.05% for the week.

Market News

Retail Sales:

The retail sales figures for September exceeded expectations, showing a month-over-month increase of 0.4%. However, this marks only a 1.7% rise compared to the same period last year, indicating that when adjusted for September’s CPI inflation rate of 2.4%, real retail sales growth declined -0.7%. Excluding weaker auto sales, retail sales actually increased by 0.5%, as auto sales put a slight drag on headline figures.

By category, non-store retailers, which encompass online shopping, experienced a strong annual boost of 7.1% sales growth compared to September 2023, while sales at food and drinking establishments rose by 3.7%. Data continues to demonstrate that the U.S. economy is slowing down from its post-pandemic boom, but questions remain about whether this represents a normalization or the onset of a recession.

Housing Permits, Starts, & Completions:

The residential real estate sector continues to face the implications of higher interest rates, even as the Federal Reserve began cutting rates last month, as seen in September’s new residential construction report. Building permits, which serve as a proxy for future projects, came in at 1.428 million, representing a decline of -2.9% from August and -5.7% lower than a year ago.

Housing starts also decreased to 1.354 million, down -0.5% from August and -0.7% from September 2023. Completions totaled 1.68 million, reflecting a -5.7% drop from August but an increase of 14.6% compared to the same time last year.

While new housing supply remains significantly below levels seen in the early 2000s, analysts are optimistic about the longer-term upward trend and the impending tailwinds of the Fed’s rate cuts, which may soon help stimulate new residential housing supply.

Q3 Earnings Update

As of Friday, October 18th, 14% of S&P 500 companies have reported their Q3 earnings, and the results appear mixed. While the percentage of companies exceeding earnings expectations is higher than recent averages, the size of these earnings surprises is below historical norms.

Financials, often viewed as the earliest to report sector, have been outperforming expectations, with EPS growth expected to be 4.9% YoY currently, compared to previous estimates of a -0.5% decline.

Other sectors have seen notable revisions down in EPS estimates from analysts, including energy, industrials, and health care. As a result, earnings growth for the S&P 500 is now anticipated to be around 3.4% annually, a decrease from the 4.3% growth expected as of September 30th.

Q3 Earnings

Earnings season kicked off last week, with major banks like JP Morgan and Wells Fargo reporting better-than-expected results. As of October 11th, analysts expect the S&P 500 to post 4.1% earnings growth across the index, though this projection has decreased slightly in recent weeks.

Information technology, communication services, health care, and real estate are expected to deliver the strongest earnings growth, although some of these sectors have seen downward revisions in their forecasts over the past two weeks. In contrast, energy, materials, consumer staples, and consumer discretionary sectors are expected to post the weakest earnings growth.

With the majority of the S&P 500 still to report, these estimates and sector performance outlooks may shift, but it’s helpful to have an understanding of analysts’ expectations as earnings season unfolds. If earnings growing across the S&P 500 ends near the expected 4.1%, this would align with the Federal Reserve’s goal of a soft landing, where economic growth moderates but remains stable.

Source: FactSet

Recession Indicators

According to the October Manufacturing Business Outlook Survey, a survey of manufacturing activity in the Philadelphia region, showed stability and expansion in October, driven by increases in current general activity, new orders, and shipments.

Over 24% of the firms reported increases in general activity this month, while 14% indicated decreases; 57% reported no change. Most firms (76%) reported stable employment levels, with the percentage reporting decreases (13%) narrowly exceeding those reporting increases (11%).

Source: Federal Reserve Bank of Philadelphia

Beyond this survey, overall economic conditions appear to be slowing but remain steady, with four of our recession indicators indicating a bullish outlook, three bearish, and one neutral. The key question in the current market environment is whether this slowdown in economic activity is benign or the beginning of a more significant downturn. For now, we remain cautiously optimistic and believe there is a reasonable chance that the Federal Reserve will achieve its intended soft landing.

Summary

Markets continued their positive trend last week as retail sales posted better than expected, increasing by 0.4% in September, though real retail sales showed a slight decline annually after adjusting for inflation. The housing market faced ongoing challenges from higher interest rates, with new residential construction activity declining from a year ago. Q3 earnings season began with mixed results; although many companies surpassed expectations, the size of earnings surprises was below average, and growth estimates were revised downward in sectors like energy and healthcare. With signs of a slowing economy, recession indicators remain mixed, ultimately leading to our cautiously optimistic outlook for a soft landing based on current data.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.

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