The Elevage Partners outlook for the remainder of the year
The war in Ukraine is closing on its third year. The Middle East is witnessing worrisome escalation between Israel and Iran and its terror proxies (Hamas, Hezbollah and the Houthis from Yemen). Hurricane Helene just delivered catastrophic destruction across the Southeast. Dockworkers at East Coast and Gulf Coast ports have started a strike that could cause serious damage to the U.S. economy right before the all-important holiday season. Lest we forget, there is an important presidential election in a little over a month.
Chief Investment Officer Thierry Hasse
With inflation slowing toward a 2% annual rate, the Federal Reserve is easing monetary policy.
Fixed income markets enjoyed a solid run of positive performance as the Federal Reserve finally changed its monetary policy and cut interest rates by a greater than anticipated 50 basis points on Sept. 18. Fed Chairman Jerome Powell emphasized that the rate cut was aimed to “recalibrate” monetary policy, taking into account the solid progress made in reducing inflation. It was not, he said, a reflection of economic weakness.
The latest inflation data, from the Personal Consumption Expenditure Index, was unequivocally positive. In August it rose only 0.1% from July and was up 2.2% year over year, within striking distance of the Federal Reserve’s 2% target. Thanks to this improvement, the Fed is shifting its focus from fighting inflation to supporting the labor market and economic activity. It may, however, be too early to declare victory over inflation.
U.S. equity markets had stellar performance during the first nine months of 2024.
The S&P 500 Index registered a 20% gain for the year through Sept. 30, while averaging more than one record high per week. Importantly for all investors, the market “breadth,” which measures the number of stocks that participate in the upside, has markedly improved. It’s now concentrated beyond the mega-cap technology companies that have driven the performance of U.S. equity markets since 2022. As an example of this dynamic in the third quarter, the equal-weighted S&P 500 is up nearly 9% while the Nasdaq 100 (where large technology companies are dominant) is up less than 2%. (Source: CNBC.) This wider participation in stock market gains is important. This positive performance distributed among a larger number of companies and economic sectors is another reason for our increased confidence.
The second leg that supports our positive stance on U.S. equity markets is that companies are reporting record profits. The S&P 500 earnings are on track to hit $240 a share for 2024 and projected to still increase another 15% in 2025, to $277 a share. (Source: Bloomberg.) While projections are often optimistic, the U.S. equity markets have room to keep marching higher if the top 500 U.S. companies come close to realizing this forecast over the next 15 months.
What could go wrong when you have a Federal Reserve supporting the economy and corporations demonstrating strong financial performance and solid prospects for continued earnings growth for 2025 and beyond?
In our introduction we included a list – too long, unfortunately – of recent negative developments around the world. While there is always the risk of one conflict spinning out of control, from a financial perspective these developments are not strong enough to derail the U.S. economy. A cynical observer might point to the fact that the U.S. military-industrial complex is largely benefitting from higher global defense expenditures.
The larger risk to U.S. prosperity is financial: Namely that interest rates rise sharply, putting stress on consumers and corporations. A case in point was the sharp negative performance of U.S. stock markets from January to October 2022 as the Federal Reserve was raising rates to fight inflation. While as we noted earlier the Federal Reserve is expected to reduce rates over the next 18 months, one cannot dismiss the possibility that long-term rates could rise. This would create headwinds for both fixed income and equity markets.
We strive to protect client portfolios against this real risk by limiting the majority of our bond investments to short maturities in the 1- to 3-year range. Should Treasury yields rise in a sustained fashion above 5%, we would modify our stance and increase the duration of our fixed income investments. In our Focus Equity portfolio, the overwhelming majority of our equity positions remain in dominant, U.S. multinational companies with strong balance sheets and little leverage. This generally means that they are less sensitive to the absolute level of interest rates.
Do not hesitate to reach out to us with any questions on the financial markets or to review your portfolio to ensure that your investments continue to support your WHY.
Thierry Hasse, Chief Investment Officer
October 2, 2024
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.