The market action was primarily driven by the horrific events in the Israel-Hamas war, with a mixed performance from stocks while investors sought safe-haven assets such as U.S. Treasury bonds and gold. Defense and Energy sector shares rallied, with militaries engaging and oil prices surging. Consumer stocks were the bottom performers, and the University of Michigan preliminary consumer sentiment survey registered a sharp drop in October. Despite full employment and extremely healthy household balance sheets, consumer sentiment has remained at depressed levels lower than during the onset of the pandemic, and in line with the readings during the 2008 financial crisis. Stocks and bonds benefited from remarks made Friday by FOMC voting member Patrick Harker, President of the Federal Reserve Bank of Philadelphia, who said he does not expect interest rates to be raised further. We certainly agree and believe that rate cuts are on deck in 2024. Bank stocks fared well after the Q3 earnings season was kicked off by reports from JPMorgan, Citigroup, and Wells Fargo. JPM announced another quarter of record net interest income amid elevated interest rates and increased its full-year net interest income guidance, albeit accompanied by increased rates of consumer loan delinquencies in credit cards and auto loans.
Treasury yields were lower, with the 10-year yield down 15 basis points to 4.62%. The 2-year yield held steadier at around 5.05%. The S&P 500 added 0.4%, but the tech-focused Nasdaq fell 0.2%, and the small-cap Russell 2000 shed 1.5%. The Russell 2000 Value ETF (IWN) is now trading with an average forecasted P/E of under 10, with 5-year forecasted annual earnings growth of 15%. We think patient investors could be handsomely rewarded by investing in that asset class, which is an area of long-term focus at North Star. These low valuations seem extreme, and some sectors have uncommonly negative sentiment suggesting opportunity. In health care, for example, a mania regarding Ozempic, and similar weight loss drugs is driving extremely negative sentiment toward many other subsectors, such as hospitals, dialysis providers, and other treatment businesses. It seems unlikely that weight loss drugs are going to eliminate the secular trends that continue to increase healthcare spending as a percentage of world GDP.
Look Through the Fog
Whereas war headlines will dominate the narrative, it is also a busy week of economic data and earnings releases. The economic data, including retail sales, industrial production, and housing starts for September, are all anticipated to show incremental month-over-month gains. Of particular interest will be the speech by Federal Reserve Chairman Jerome Powell on October 19 as the blackout period for Fed speakers ahead of the Halloween FOMC meeting rapidly approaches. Let’s hope the Chairman has some treats for us, rather than additional tricks.
The Q3 earnings season also kicks into high gear next week, with 55 S&P 500 companies reporting results. Following last week’s positive earnings surprises, the index is now on track to post 0.4% growth in the quarter, snapping three straight quarterly declines. The Bull case for stocks in 2024 is the combination of a resumption of earnings growth and less restrictive monetary policy.
We will be working on developing a Bull case on the Chicago sports scene for a future commentary.