Portfolio Manager Commentary

November 15, 2024

Economic Outlook

The ISM Services Index for October increased to 56 for October, the highest reading in two years. Industrial Production in the U.S. decreased 0.3% year over year. The Markit Manufacturing Index rose to 48.5 for October, following a 15-month low in September. The NFIB Small Business Optimism Index rose to 93.7 and will likely increase in the short term due to the speed and decisiveness of the presidential election results. U.S. Capacity Utilization for October fell slightly to 77.1%. Retail Sales increased 2.8% year over year in October. The Consumer Price Index rose by 0.2% in October, marking a 2.6% annual increase. During the same period, producer prices showed a modest 0.2% rise month over month, resulting in annual PPI growth of 2.4%. The 5-year Breakeven Inflation Rate is approaching its highest level in 2024, rising from 1.86% to 2.46% since mid-September. Next week, new economic data releases include Housing Starts on Tuesday and the Index of Leading Economic Indicators on Thursday. The average interest rate for a 30-year fixed rate mortgage is 6.78%.

Fixed Income

The current federal funds target rate was lowered to 4.50-4.75%, following a 25 bps cut at the November FOMC meeting. The 10-year yield is currently 4.47%, 14 basis points above the 2-year yield of 4.33%. The U.S. Treasury yield curve continues to flatten as ultra-short duration bond yields fall. However, bonds along the rest of the yield curve remain elevated from the lows seen in mid-September. While yields often rise in the two months following the first rate cut, the current cycle has demonstrated the second-largest absolute increase in yields going back to 1970. The next FOMC meeting is scheduled for December 17-18, 2024. Futures markets are currently split on whether to expect a 25 bps rate cut or a pause at the next meeting.

Yield Curve

Current Generic Bond Yields

Equity

With nearly all companies having reported Q3 2024 earnings, the year over year earnings growth rate for the S&P 500 is 5.3%. The forward P/E ratio for the index is approximately 22.2. This P/E ratio is above the 5-year average (19.6) and above the 10-year average (18.1). Equity markets continue to provide strong returns with the S&P 500 having closed at an all-time high 50 times this year. Currently, the S&P 500 and Dow Jones are within 2% of an all-time high, and the NASDAQ Composite is nearly 3% from its peak.

Year to date, the best performing sectors have been Information Technology (+35.18%), Communication Services (+34.57%), and Financials (+31.61%). The worst performing sectors this year have been Health Care (+5.86%), Real Estate (+6.85%), and Materials (+7.17%). On a total return basis, the Russell 1000 Growth Index has increased 31.36% year to date, while the Russell 1000 Value Index has returned 19.11% over the same period.