As we enter into the post-election stretch for 2024, we believe the market is supported by a few notable conditions:
• Overall favorable economic conditions including consumer spending growth and moderate inflation,
• Good overall earnings for U.S. publicly-traded companies, and
• A removal of the veil of uncertainly related to the presidential election.
These elements seem to us to incentivize investors to stay in the market generally speaking for the remainder of 2024.
That said, we note that the valuation of the market, as measured by commonly used metrics like the price-to-earnings ratio, appears to be higher than the historical average. For example, the S&P 500's price-to-earnings ratio currently stands at 29x trailing earnings vs. a long-term average of below 20x.1As a result, market participants are likely assuming continued earnings growth and may be more sensitive than usual to economic reports that put that into question.
The U.S. equity market experienced a volatile week, largely due to mixed corporate earnings reports from megacap tech stocks including Alphabet (GOOG)(GOOGL), Meta Platforms (META), Microsoft (MSFT), Amazon (AMZN), and Apple (APPL).
For the week, the broad benchmark S&P 500 slid -1.4%, the tech-heavy Nasdaq composite fell -1.5%, and the blue-chip Dow Jones Industrial average finished mostly flat, declining -0.1%.
The economic calendar also saw a slew of influential economic data this week. Starting with an advance estimate on the U.S. Q3 GDP growth rate, an updated reading of the Federal Reserve’s preferred measure of inflation [Personal Consumption Expenditures (PCE)], and the October jobs report.
Overall, the data showed the economy appears to be growing at a respectable rate driven by resilient consumer spending, while inflation pressures are easing solidly. Income is at a level that maintains spending, and spending is strong enough to promote modest expansion.
The U.S. economy posted another solid though slightly less than expected growth in the third quarter. Theadvance estimate for Q3 Real GDPcame in at an annual growth rate of 2.8%, below the 3.1% estimate and 3.0% rate seen in the second quarter. Strong consumer spending (which comprises nearly 70 percent of GDP) boosted the economy higher, as did contributions from increased government spending and exports, offset by a spike in imports.
Furthermore, thepersonal consumption expenditure price index (PCE), a key indicator of the average change in price for all domestic personal consumption came in line with expectations, showing inflation is moving closer to the Federal Reserve’s long-term target of 2.0%.
Core PCE, which excludes volatile categories of food and energy, rose at a 2.7% pace from a year ago. Including food and energy, the headline gauge increased by 2.1%, moderated from the 2.3% measured in September.
While the inflation number indicated further progress, the personal spending and income measures came in lighter than expected. Personal income increased 0.2% for the month, while spending rose 0.2%. The respective estimates were targeting a 0.4% rise in income and a 0.3% boost in spending.
Lastly, Friday’s release of theU.S. nonfarm monthly jobs reportshowed job creation weakened to its slowest pace since December 2020, impacted by hurricanes in the Southeast region and significant labor strikes (Boeing).
Nonfarm payrolls increased by 12,000 in October and revisions lowered the previous two months’ job adds (August and September) to a combined total of 112,000 jobs. The Bureau of Labor Statistics noted the Boeing strike likely subtracted 44,000 jobs in the manufacturing sector; however, the impact from hurricanes Helene and Milton is impossible to quantify.
The report also showed the unemployment rate came in line with expectations, holding steady at 4.1%. The average hourly earnings increased 0.4% for the month, slightly higher than expected.
While the total jobs added to the economy painted a grim picture, we believe the impacts from the recent hurricanes and strikes are temporary events and are not indicative of a collapse in the labor market.
