With the World Series going on right now between our hometown Philadelphia Phillies and the Houston Astros, it has been pretty exciting here in the Philly area, so I thought we’d keep the momentum going in this week’s note with a baseball theme related to the markets. And with where we are right now it’s pretty good timing. Because it seems like the “stage is set” with everything starting to line up between Fed speak, economic data, and earnings reports as we approach year-end. So, in a way, we have a “bases loaded” situation where we have all our players in their ready stance and the pitcher has the signal. Now, all we need to do is wait and see what happens next. That is the big question here and of course, no one really knows the answer but all we can do is prepare ourselves for what could happen and use the information we have to make smart investment decisions.
Speaking of which, let’s load the bases here with the “Fed at first”. They gave us some more insight this week about the economy and pretty much shut down any possibility of a dovish pivot anytime soon as they raised rates yet again another 75 bps. But that was to be expected given inflation still remains at historic highs. And the jobs market continuing to show signs of strength. Chairman Powell pretty much said the Fed would not be pausing but did say he expects a discussion about slowing the pace of rate hikes in the next meeting or two. He said, “that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made”. He also said, “the ultimate level of interest rates will be higher than previously expected”. Certainly not the greatest of news to get from the Fed but again it’s no surprise given where we are in this cycle.
At second base, we have the economy and all the players in that space we’ve been grappling with all year. Supply chain, Zero Covid, the war, and of course jobs and manufacturing here at home. And this week we got more job data with the September JOLTS report that showed an increase in job openings to 10.7 million, well above the FactSet estimate of 9.85 million. That makes it 1.9 job openings for every available worker out there and doesn’t bode very well for the Fed to pivot anytime soon. Which was reiterated in the Fed’s decision and commentary this week. We also got new data on manufacturing with the ISM index coming in at 50.2 for October. Which is right at the lower limit of an expanding economy (> 50 is expansion) so that is certainly showing signs of slowing. This is what the Fed wants but it’s only half of the puzzle with jobs still showing resilience.
And finally, at third base, we have earnings. So far, we’ve had three solid weeks of earnings. The first week was pretty good with the banks, last week was a bust with big tech (but energy bucked the trend to end the week on a high note; Chevron for example which we own in the models), and this week has been “so-so” with the chips. However, earnings this week have been overshadowed by the Fed. But in a nutshell, as of 10/28, 52% of S&P companies have reported and 71% of those companies have reported a positive earnings surprise. Forward P/E still remains low at 16.3 showing the market may be trading undervalued at the moment. Something to keep in mind here to potentially reposition clients for the new year. And harvest losses. Earnings projections are still favorable for the calendar year too at 6.1% and 6.4% for 2023 – both within normal historical averages for the stock market.
The key to a successful baseball team is to have a group of position players who are the best at what they do. So they complement one another. From pitching to fielding to hitting and running the bases. And having the right players in the right spot for that big moment. It’s no different in asset management but we are simply using asset classes as our players. And the key there is to invest in asset classes that don’t correlate with one another. In other words, so they complement each other. Just like the baseball players. That is what we try to do in the GVA models. One great example is our recent addition of Alternatives in the models to help diversify risk away from equities and fixed income. This has allowed us to have lower correlations across the board. You can see that on this file which shows lower correlations as compared to stocks and bonds with three of the Alternative funds we hold in the models (LOTIX, LFMIX and LCSIX). And with the declines this year in both equities and bonds, Alternatives have made a case to make a switch from the classic 60/40 model to a 60/20/20 model.
We still maintain a defensive theme across the board in the GVA Asset Management models and do expect more volatility as we close out the year. But we feel we have our players lined up to weather the storm. Let’s see what the next pitch is and what happens in the field.
Have a great weekend!
*All data sourced from Yahoo Finance as of the close on the date indicated.
- The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
- There is no assurance that any products or strategies discussed are suitable for all investors or will yield positive outcomes. Any economic forecasts set forth in this note may not develop as predicted.
- All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
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