8th October 2024

Weekly Index Movement

S&P500+0.2%
Nasdaq+0.1%
Aussie All Ords-0.7%

We took a well earned rest yesterday as NSW enjoyed a public holiday so we are a day late reporting this week. But that gives me a chance to talk about what happened last night too.

Before that, let’s look at the biggest news from last week – the US employment report on Friday.

The US added +254,000 new jobs in September, much better than the expected +140,000. They also revised the prior two months, August numbers went up 17,000 and July numbers went up 89,000.

I’ve never understood why they can’t get the numbers right first time around. Take July. When first announced it was +114,000. The next month they said “sorry we got it wrong it should have been +89,000” and now they say “whoops. still wrong. Now we think it was +144,000”

Who knows what the real number was? It also begs the question of whether there is any value in tracking the number anyway if they change it both up and down in future months.

But one part of the report is worth mentioning and that is the percentage increase in average hourly wages. These rose year-over-year to +4.0%. Up from +3.9% in August and +3.6% in July.

The concern here is this worrying trend could be inflationary.

Powell often cites wage growth of +3.2% as consistent with the FOMC 2% inflation target. The trend of lower wage growth is changing and needs to reverse back again next month or the market will start to worry about inflation.

This year feels like a constant battle between worrying about imminent recession and higher for longer interest rates.

The market rose 1% on the employment news which shows traders are more focused on growth in company earnings than interest rates now.

Which is a good because the market has now adjusted and is inline with the FOMC expectations of a 25bps cut at the next meeting. The thought of +50bps has all but disappeared.

Our view on this constant flipping and flopping of concern about recession to concern about high interest rates is consistent with a mid cycle bull market and confirms the fact we are actually in the middle of a bull market which means more gains to come.

Stock prices will move higher over the next 12-24 months. They just won’t do it in a straight line.

US Large Cap Financials Sector ETF – XLF

This week I am going to talk about the financials sector and use it as education.

The upcoming Q3 reporting season will offer up a useful reminder that the US large cap Financial Sector (XLF) is a lot more than just banks, so let’s start the discussion with a breakdown of the groups’ weightings:

  • Financial Services: 32 percent
  • Banks: 24 percent
  • Capital Markets: 23 percent
  • Insurance: 17 percent
  • Consumer Finance: 4 percent

The upshot here is that non-banks are 76 percent of the Financials ETF, so the fundamentals underpinning these subsectors are very different to what’s going on with loan growth and net margins.

The following chart from FactSet shows the consensus estimate in year over year growth for each Financials sector subgroup:

Overall Financials don’t look very exciting. Wall Street is looking for a slight decline (-0.4%) from last year

But that is all down to the Banks, expected to show a 12 percent decrease.

The rest of the group should show year over year earnings growth. The best of which is to come from Capital Markets with an 11% gain. As a reference the S&P500 is expected to show an average +4.2% gain, so looking to capital markets is a great place to start finding opportunities.

For those wondering, the largest holding in Capital Markets is LPL Financial Holdings (LPLA). A stock we happen to hold in our Global Growth Model Portfolio.

The education part of this discussion is to highlight that sector level ETFs are not necessarily what you first think and it pays to understand just what it is you are buying. Things are not always exactly what they seem.

Q4 Seasonality

As you are probably aware from reading our stuff (and the stuff of others no doubt), Q4 has historically been a bullish time of year for the US stock market (and by extension Australia too as we just follow).

Below you can see the average performance by quarter of the S&P500 index since WW2.

Q4 has been higher 79.5% of the time with an average gain of +4.2%

We see no reason why this year will be any different.

Middle East Conflict

We aren’t going to comment much on this here, we are a financial missive and not political. But it does bear thinking about as it could impact your assets.

There is no sign of de-escalation. If fact, we suspect this will continue for some time.

Is it going to cause stock markets to crash?

We have no idea, so we will listen to the market rather than try and predict something we have no expertise in….and the market is not at all concerned.

Yes Oil has moved up a few dollars, as to be expected but stocks are still knocking on the door of all time highs. If there was any real concern, stocks would be falling. Yes, they fell on Monday but that was due to 10 yr bond yields rising over 4.0%, not anything to do with geopolitical actions.

Those bond yields rising is simply a reaction to the wage growth numbers on Friday as it might take the Fed longer to reduce rates if this wage growth is persistent. Higher rates for longer means a higher 10 year yield and that’s bad for stocks which is why they fell.

We have always said it pays to hold some of your portfolio in the Oil sector. The last couple of weeks is exactly why. You never know when an Oil shock is coming, but it happens far more regularly than you expect.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.