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.

  1. 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.
  2. 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.
  3. Auto strikes picking up steam:
    • Targeting parts and distribution, the latest action could frustrate consumers who bring vehicles in for servicing.
  4. 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.
  5. 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.

  6. Factory growth across the US is a bright spot:

    • Chips, vehicles, and drugs as reshoring gains momentum.

    • Companies are more likely to look to the U.S. for incremental manufacturing.

    • This is supporting and creating jobs.

  7. 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.