US Strategy Weekly: Dichotomies and Disparities

This is a peak earnings reporting week, and it will include results from a number of FAANG components. Many third quarter results have been excellent including Google’s parent Alphabet Inc. A (GOOGL – $169.68) which beat on the top and bottom line. These results were helped by a 35% increase in its cloud business and a rise in digital advertising revenue. But note, digital advertising results were boosted by both the 2024 Paris Olympics in August and political spending ahead of the presidential election. These are one-time events. Visa Inc. (V – $281.88) reported a fourth-quarter profit that beat expectations, and it showed that consumer spending continues to be resilient. Payments volume rose 8% in the quarter. Visa also noted that it plans to lay off about 1400 employees and contractors by the end of the year and expects profit growth per share to be “at the high end of low double digits” for 2025.

But as much as we believe corporate earnings and earnings growth are the most important events of the current week, it is clear that investors are fully focused on the presidential election. And according to the pundits, markets are in the process of discounting a Trump re-election even though the polls suggest it is too close to call. In particular, the benchmark 10-year US Treasury yield has jumped from 3.6% in mid-September to a four-month high of nearly 4.3% recently. Bond gurus are indicating that investors are wary to buy debt before next week’s elections due to fears that a Trump win would increase the deficit and inflation. Nonetheless, yields did ease after a strong seven-year note auction this week.

Stocks and Elections

Historically, the stock market has had a decent record of predicting the results of presidential elections. The presidential election year has traditionally been the second-best performing year of the four-year cycle with gains averaging 6% in the Dow Jones Industrial Average. Normally, the first half of the year is lackluster, the third quarter is the weakest, and the last two months of the year tend to produce solid gains. The month of October is the most telling because weakness just ahead of the election suggests an incumbent loss whereas strength in October is indicative of an incumbent win. See page 5.

However, 2024 has not been a typical year and the DJIA has already generated a 12% gain year-to-date. And while to date the DJIA is down slightly in October, this index is widely underperforming the S&P 500 which is up 1.2% in the same time frame. The Nasdaq Composite is now up 2.9% in October and even the Russell 2000 index has eked out a 1.4% gain. In short, the market is sending a mixed message to investors.

What we found interesting was a Bloomberg poll that indicated that nearly 40% of investors polled felt a Trump victory would be good for stock prices and that the gains of 2% per month seen in 2024 to date, would accelerate should he win the White House. See page 5. This is the opposite of comments from most economists who indicate that both deficits and inflation would be worse under Trump and stock prices could fall. But as we noted last week, the most important elections on November 5^th will be the Congressional races. A president can be a major force in foreign relations and on the border, but Congress controls the purse strings, which includes spending and taxation.

Economic data is mixed

Final numbers for October’s University of Michigan consumer sentiment survey were revised upward and this added slightly to September’s gains. Still, the University of Michigan sentiment readings for headline, present, and expected, remain low and at recessionary levels. The Conference Board’s consumer confidence index increased more than expected in October, from the upwardly revised 99.2 (previously 98.7) in September to 108.7, the strongest monthly gain since March 2021. Nevertheless, October’s headline sentiment reading remains stuck in the narrow range it has held for the last three years. The good news in the Conference Board report is that the expectations index remained above 80, because readings below this level tend to correspond with recessions. See page 3.

Existing home sales dipped lower in September to 3.84 million units, down from the 3.88 million units reported in August. This was down 3.5% YOY. The months of supply of homes rose from 4.2 to 4.3. The median price of a single-family home was $404,500, down for the month but still up 3% YOY. New home sales were 738,000 in September, up slightly from August, and up 6.3% YOY. The months of supply fell from 7.9 to 7.6. The price of a single-family new home jumped from $405,600 in August to $426,600 in September, but this was relatively unchanged on a year-over-year basis. See page 4.

Dichotomies and Disparities

Politics has been impacting a number of commodities recently. Crude oil prices fell sharply on news that Israel would not bomb Iranian oil facilities, and that Saudi Arabia was committed to crude capacity of 12.3 million barrels per day. Prices are also weaker due to expectations of slower global growth. This decline should be favorable for future inflation reports. However, gold futures and derivatives continue to set new record highs. Gold has not been a good indicator of inflation in recent years, and we attribute the recent surge in gold to tensions in the Middle East and Europe which is driving countries and investors toward gold as a safe haven investment. Turkey (in the Middle East) and Poland (which borders Ukraine) have been large buyers of gold recently. As noted, the 10-year Treasury yield continues to climb. In normal times this would be the result or anticipation of stronger economic growth and/or inflation. However, the current rise in rates is most likely a fear of rising deficits. It is an interesting dichotomy of trends. See page 8.  

There is also a disparity in the performance of the popular indices. The year-to-date gains of 22.3% in the S&P 500 index, 12.1% in the Dow Jones Industrial Average, 24.7% in the Nasdaq Composite Index, and 10.4% in the Russell 2000 index are similar to the performances seen in the month of October. But a lot of this can be explained by a recent post from FactSet that indicated that as of October 21^st, the Magnificent 7 companies were reporting third quarter earnings growth of 18.1% YOY, whereas the remaining 493 companies in the S&P 500 were reporting earnings growth of 0.1% YOY. Much like the US economy, corporate America is a story of the haves and the have-nots.

Technical Indicators

The 25-day up/down volume oscillator is 0.22 and neutral after spending five consecutive days in overbought territory earlier in the month. This oscillator was also in overbought territory for seven of eight days ending September 19, the last six of these sessions were consecutive. In short, recent readings have been good enough to confirm the new highs in the averages. Nevertheless, this indicator suggests the rally is a continuation, not the beginning, of a bull cycle. See page 10. The 10-day average of daily new highs fell to 258 this week and new lows are slightly higher at 49. This combination of new highs above 100 and new lows below 100 remains positive but the trends in both are deteriorating. The NYSE advance/decline line made a new record high on October 18, 2024. Overall, breadth indicators are positive, but volume has been declining and there are signs of deceleration in recent days.

Gail Dudack

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