Thoughts on the Markets for Q4 2023
Interest Rates seem higher for longer, the dollar and crude continue to rise. The S&P index is as of this afternoon on a technical basis oversold and on support at the 150-day moving average at 4266. I am thinking the S&P will hold and feel this is a time to sit tight and hang on. There are a few clouds out there that are concerning. Globally economies are cooling off as rates march higher.
- Economic uncertainty in China:
- The world's second-largest economy is in a predicament and the property market stands at the heart of its troubles.
- Construction accounts for as much as a quarter of China's GDP.
- Real estate reverberations are eroding confidence and many are afraid about its indirect effect on the overall economy.
- Housing sales, prices and investment are declining.
- Deflation threatens to fuel an even bigger disaster for a country that is coming out of a 3 year lockdown from COVID.
- No meeting of the minds in Washington points to a looming shutdown:
- The U.S. House and Senate plan to take sharply divergent paths in a high-stakes spending battle.
- September 30th is the deadline that could force wide swaths of the government to shut down for the fourth time in a decade.
- Moody's warned earlier this week that a shutdown this time would have negative implications for the U.S. government's AAA credit rating.
- Auto strikes picking up steam:
- Targeting parts and distribution, the latest action could frustrate consumers who bring vehicles in for servicing.
- Student loan payments :
- Scheduled to start again October 1 might squeeze some consumer’s budgets.
- According to the DOE, interest on loans will start accruing September 1st.
- A higher for longer interest rate environment:
- Borrowing costs have risen sharply in the past 18 months as the Fed ratcheted up interest rates to tame the surge in inflation.
- For investors, I think now is the time to add duration.
- I have been wrong for the past 60 days.
- According to Bankrate, as of September 27th, 2023, the national average for a 30-year mortgage is 7.78%
- Housing sales are grinding to a halt as rates are the highest since 2000.
- Commercial real estate loans coming due in tandem with the lower occupancy rates could put enormous strain on the real-estate sector and smaller commercial banks.
- I am not sure all of the regional banks are on solid footing in this environment.
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Factory growth across the US is a bright spot:
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Chips, vehicles, and drugs as reshoring gains momentum.
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Companies are more likely to look to the U.S. for incremental manufacturing.
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This is supporting and creating jobs.
- Thoughts on oil:
- I do not see peak oil demand coming anytime soon as:
- Demand from emerging and developing economies continues to increase.
- The total addressable market of future energy demand is massive some of which will be met with renewables.
- The low levels of industry capital expenditures is pointing to a future supply crunch.
Below are my thoughts on allocating capital in this inflationary/recession risk environment:
Quality and Income:
- I focus on utilizing investment managers at Oppenheimer whose core focus is on either income, quality, or both together.
- The Quality theme extends to companies with stable cash flows and dividends as well.
- Focusing on companies with pricing power can pass along higher costs and therefore are better suited to weather inflation and a recession.
International:
- Equity markets outside the United States, specifically the emerging markets and Europe—are currently trading with lower valuations to their US peers.
- As rates outside the US return to ranges that are more normal, the dollar should weaken.
- I believe international equity allocations should be increased.
Growth and Innovation:
- The 4th industrial revolution is still in the early innings.
- Technologies like generative AI have surged since last November when ChatGPT launched.
- Generative AI applications are designed to produce original text, images, and computer code. based on users’ natural-language prompts.
- Will be bottom line accretive for innovative adapters.
Active manager strategies on our platform that I am comfortable investing in:
- International equities with low PE’s and a reversing dollar.
- Dividend payers who maintain the dividend and have pricing power.
- Water names and associated infrastructure, waste water, and efficiencies.
- Growth Tech that is reshaping the way we live our lives- innovation is just getting started.
- Utilities and associated names involved in the global energy transition.
- Medium duration corporate quality and high-yield debt as well as Munis.
- India with the largest fastest growing middle class in the world.