Weekly Research Briefing: Welcome to the Fourth Quarter
So much for a weak September for the stock market. I count only 8 down days out of 20 for the S&P 500 index. September will also make the 5th positive month in a row, and the 10th gainer out of the last 11 months. What is not to like? Inflation has rolled over and the Fed is lowering rates in a position of strength to help the weakening job picture. The credit and lending markets are currently super accommodating and those that want capital to grow are finding it. The U.S. economy is still tracking at a 2-3% growth rate for the Q3 and the Chinese central bank just pulled out the entire toolbox to get their economy restarted. Most every company valuation and hard asset value has the wind at its back right now. As we move through the fourth quarter, history has shown us that this is the best time of the year for investing.
Last week's PCE index further confirmed that the Fed's primary inflation measure is very near to its 2% target. This will give them even more room to cut the Fed Funds rate further into the future depending upon how the job market evolves. We get jobs data to look at this week. Weak job numbers should not be a surprise given they will reflect September's slowing economic picture. The data could also be impacted by last week's hurricane which cut power to millions and may cost over $200b in economic damage and losses. Take care and be safe to everyone in the Southeast U.S.
The big balloons are moving higher and taking the world with it...
Four out of five companies in the largest stock index in the world are trading above their 200-day moving average. The S&P 500 is sending out economic and valuation signals. Time to listen closely.
And look at the new balloons joining the fray...
Unlike the beginning of the year, the recent performance has broadened out significantly with the more interest rate and economically sensitive sectors ringing the bells.
Now for a look at current S&P 500 sector valuations...
15-16x EV/EBITDA for many of the S&P 500 sectors. How does this compare to the valuations that you are paying for your companies right now?
Stocks follow earnings...
So if Ed Yardeni is correct about his $325 earnings estimate for 2026, a 6,500 S&P 500 should be easy (20x).
For stock investors, the 4th quarter is celebration time...
Corporate stock repurchases will restart as the tax-loss selling winds down. And don't forget the 'fat guy in the red suit' impact during December combined with optimism for a new year.
(@RyanDetrick)
If I haven't convinced you yet that shorting this market is a bad idea...
@RyanDetrick: Good news for the bulls? S&P 500 higher first 8 of 9 months (has never done all 9), then Q4 does even better. Up every single time (8 for 8), with an average gain of 6.6% vs average Q4 of 4.3%.
Meanwhile, the incredible credit markets are continuing to act like helium for all risk asset balloons...
@dailychartbook: "CCC spreads to single-B have fallen for most of 2024 and are back to their lowest level in two years, suggesting limited recession risks." - Morgan Stanley
Also, don't fight easing financial conditions...
@KevRGordon: Over the past 30 years, there have only been a few periods during which the GS U.S. Financial Conditions Index has been looser/easier than it is today: 2020-2022, 2018, 1998-2000
In a surprise move, the Chinese government launched a dragon shaped hot air balloon last week...
Backed by a flood of easing measures from rate cuts to bank capital injections to housing incentives, the China central bank decided it was tired sitting out of the great world stock market rally. It is too early to tell if the moves made will be enough to put China back onto a 5%+ economic growth track, but the market's reaction suggests that it is no longer time to bet against the country. While the shorts cover their positions, the underexposed longs will consider if now is the time to buy. Definitely one of the larger broad moves in any single stock market in many years.
(@MacroCharts)
Given the negative sentiment, Chinese equities were a coiled spring just waiting for a catalyst...
@hmeisler: Long Mag 7/Short KWEB seems to be the crowded trade
So how do Chinese equities look on a P/E basis? 
And how big are Chinese equities inside of the largest global ETF? 
Looking at the major indexes, the U.S. small-caps and EM equities are the ones to remain in drawdowns...
So if the market is going to have a Q4 run, it would make sense that these might be the areas to try hardest to catch up as investors roll down to stocks that have lagged. 
The big economic release last week was the PCE index. And it did not disappoint the bulls...
@NickTimiraos: The Fed's preferred inflation gauge, the PCE index, showed a gain of 2.2% in the 12 months ended August, not far from the Fed's 2% target. This measure was at 3.4% and 6.6% one and two years earlier, respectively. Core prices in this gauge (excludes volatile food and energy items) rose 2.7% in August from a year earlier. 12-month core inflation one year ago was 3.8%, and two years ago, it was 5.4%.
One of our other most favorite inflation reads also had valuable input...
A great read on one of my long-time favorite companies.
“Inflation was once again effectively flat in the quarter across all core merchandise. Food and sundries and fresh foods were slightly inflationary and this was offset by deflation in non-foods” - Costco CFO Gary Millerchip
A quick glance at the upcoming Q3 GDP reading shows good things...
And the market finally got the surge in the refinance index that it was looking for...
@RenMacLLC: While mortgage purchase applications crept up in the latest week, the decline in mortgage interest rates so far has pushed up mortgage refinancing. Year-to-date, refinancing is up over 200% while purchase applications are up about 5.0%.
Private market asset investing is where the asset management industry is headed if they want more growth...
The U.S. Asset Management industry has $120T in AUM and grows its net new flows at $3T per year. This new McKinsey & Co. report shows how the private markets are going to help grow a mostly additional $8-10T over the next 10 years.
"The good news for the asset management industry is that attractive opportunities are opening up through a balance sheet restructuring across the bank, insurance, and high-net-worth investor segments. This reorganization is being driven by changed macroeconomic realities, including elevated interest rates and an evolving regulatory environment. Here are a few trends to watch across client segments:
— Banks are curtailing their lending activities and looking to offload more loans to third parties because of higher capital requirements from regulators. Private-capital companies are stepping in to fill the void and using longer duration institutional capital for funding.
— Insurers are drastically shifting the way they invest their general accounts as private capital moves further into life insurance and annuities.
— Wealth intermediaries are increasing private-market allocations for their clients as the maturing and scaling of the private-market retail ecosystem—with new vehicle constructs, sales infrastructure, and portfolio construction tools—enables material shifts in demand.
These trends are dislodging substantial assets from their traditional homes on institutional and retail balance sheets. By our estimates, this could bring $8 trillion to $10 trillion of US AUM into the asset management industry over the next decade (Exhibit 6)."
Another big win for Ownership Works and the employees of GeoStabilization...
KKR’s top dealmakers landed in Denver on Wednesday evening for a presentation revealing the $1bn payout they had earned on the sale of an engineering company.
But the audience was not the usual assortment of well-heeled partners from institutional investors. It was the company’s blue-collar employees, who collectively will receive $75mn of the proceeds...
The sale of GeoStabilization International, which does emergency landslide repairs and provides services to prevent rockfalls, will provide a windfall to most of its 900 employees. GSI employees are set to receive between $10,000 and $325,000, with the median employee who has been with the company for three years drawing a payout of $110,000. The payouts are taken from the pot of share awards that are usually set aside for senior management during a buyout...
KKR’s private equity head, Pete Stavros, has spent the past decade-plus creating worker equity incentive awards inside the group. He has spearheaded the creation of Ownership Works, a private equity industry push to create $20bn in wealth for workers by 2030 and has drawn backing from the industry’s biggest players including Apollo Global Management, TPG and Silver Lake.
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DISCLOSURES
The author has current equity ownership in: Costco Wholesale Corp.
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