Q4 kickoff: Earnings, economic growth, and elections
E*TRADE from Morgan Stanley
US stocks are coming off an unexpectedly strong September, as economic growth supplanted inflation as the market’s primary focus, the Federal Reserve cut interest rates for the first time in more than four years, and geopolitical turmoil in the Middle East made persistent headlines.
The market’s historically weakest month of the year ended with the S&P 500 closing at an all-time high. That result may have surprised many investors, given the index fell to a nearly four-week low on September 6 after the monthly jobs report triggered concerns that a slowing economy was potentially getting stuck in the mud:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.)
While the broad stock market initially responded favorably to last month’s large (0.5%) rate cut, Morgan Stanley & Co. economists anticipate the Fed will lower rates in 0.25% increments at its final two policy meetings of the year.1
Bond prices mostly rose in September as yields posted a net retreat. The benchmark 10-year Treasury yield fell to its lowest level (3.6%) in 15 months before rebounding to end September down 13 basis points at 3.79%. Gold rallied to repeated record highs last month, while crude oil slumped (weighing on energy stocks). Globally, emerging equity markets fared much better than their developed counterparts, including the US:
Data source: Power E*TRADE and FactSet. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.) Note: crude oil, gold, and U.S. Dollar Index data reflect spot-market prices. BPS (basis point) = 0.01%. MSCI Index of Developed Markets and MSCI Emerging Markets Index represent “total-return” performance (index change including dividend reinvestment).
The November election may be poised to drive the news cycle this month, but the economy is poised to drive market returns, according to Morgan Stanley & Co. strategists. Near-term conditions could favor bonds over stocks—since, as the analysts explain, bond yields may continue to fall (which implies rising bond prices) as the Fed eases, while corporate earnings may be challenged if the economy slows.2
The economic growth story will likely continue to hinge upon the jobs picture. Morgan Stanley & Co. describes labor market data as “the most important factor” in terms of how stocks will trade over the next three to six months, making the case that upside surprises in jobs numbers—with no negative revisions to prior months—may be necessary for the stock market to sustain current valuations.3
October ushers in the final earnings season of 2024. The strategists note that earnings revision breadth (“the best proxy for company guidance”) has continued to trend sideways for the S&P 500, and trend downward for the Russell 2000 small cap index. But due to seasonal patterns, it could face negative headwinds this month.4
Shifting demographics may be opening the door to a growing investment opportunity in senior housing.
Insight of the month: trading spaces. There’s a profound shift taking place in the real estate market, with millennials needing more space, and boomers needing more services. The second half of this equation could fuel a “golden age” for senior housing, where supply is low and demand is high, according to Morgan Stanley & Co.5
October: reputation vs. reality. Despite elevated volatility and the stigma resulting from a handful of market crashes over the years, October has, historically, been a stronger-than-average month for the US stock market. Since 1957, the S&P 500 has gained ground in October 61% of the time (sixth highest), with a median return of 1.4% (fourth strongest). Since 1994, October’s performance has been more solid, with the second-strongest median return (1.9%) and fifth-highest winning percentage (65%).
Key October dates: Employment Report (10/4), FOMC minutes (10/9), Consumer Price Index (10/10), Producer Price Index (10/11), first big banks kick off earnings season (10/11), Retail Sales (10/17), Housing Starts (10/18), monthly options expiration (10/18), Durable Goods Orders (10/25), home prices (10/29), Q3 GDP (10/30), PCE Price Index (10/31).
1 MorganStanley.com. As the Fed Recalibrates, What’s Ahead for Central Banks? 9/23/24.
2 MorganStanley.com. Presidential Debate Targets Perceptions Over Policy. 9/18/24.
3,4 MorganStanley.com. One Rate Cut, Many Effects. 9/24/24.
5 MorganStanley.com. Trading Spaces: Millennials and Boomers. 9/10/24.
6 Figures reflect S&P 500 (SPX) monthly closing prices, 1957–2023. Supporting document available upon request.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.