That real 10-year Treasury yield hit 2.4% yesterday, which is actually above the 2003 to 2007 average of 2.1%. So, I don’t think that we can sustain a real 10-year Treasury yield that’s higher than it was during the housing bubble. Of course, a lot of the fixed-income market has had some very poor performance with the rise in interest rates.
- “If we declare a recession, is it going to surprise anyone that’s been trading equities over the course of the last 24 months? No, that’s the number one concern investors have had.”
- That real 10-year Treasury yield hit 2.4% yesterday, which is actually above the 2003 to 2007 average of 2.1%.
- We think inflation will come down faster than the Fed is currently projecting.
- So with rents rising dramatically over the past year (along with housing prices), it’s no wonder that CPI numbers continue to come in higher than expected.
- They might still be trading at a slight discount to fair value but still within the range that we consider to be fairly valued.
- We’ve had a really strong economy here in the third quarter.
Stocks staged a dramatic turnaround Thursday, bouncing back from significant losses at the start of trading and finishing sharply higher. Investors were disheartened at first by the Consumer Price Index report, which showed continued inflation pressures. That added to fears that multiple big rate hikes from the Federal Reserve could be ahead. From the US to Europe and Japan, equities hit all-time highs, with the most-valuable chipmaker up 16% — adding $277 billion to its market capitalization. That’s the biggest single-session increase in value ever — eclipsing a $197 billion gain made by Meta Platforms Inc.
Morningstar Stock Sectors
So, I do think the market is still trying to understand, try and digest what this might mean for the economy, what this might mean for earnings growth. I’d just note that this isn’t anywhere near as high as what we had seen back in the ‘70s and ‘80s when they were dealing with really high inflation back then. “We continue to see a tale of two economies in the data,” said Sam Khater, Freddie Mac’s chief economist. “Strong job and wage growth are keeping open source internet of things consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously.” Investors focused more on strong earnings from the likes of Delta (DAL), Dow component Walgreens (WBA) and Wall Street giant BlackRock (BLK). All 30 Dow stocks finished in green and nearly all of the S&P 500 members closed higher, led by strong gains from materials, energy and financial stocks.
The Best Companies to Own: 2024 Edition
To be honest, these returns here are already outdated over the past week and a half just as much as the 10-year has risen. But I think more importantly thinking about what we expect going forward, thinking about the 10-year Treasury, at this point, it’s always hard to know in the short term how much more the yield could rise. I’m not a technician, but taking a look at the charts here, it does look like the market does want to maybe try and test that 5% level. But for longer-term investors, we do think that rates will be coming down over time.
U.S. Markets
We were looking for being shorter in the yield curve, more in that mid-part of the yield curve earlier this year. So, again, good time to be locking in a lot of these longer-term yields. Among economically sensitive sectors, again, it’s hard to find value in that energy sector. If you are looking for energy exposure, specifically in oil and gas, I would highlight Devon Energy DVN. And within the energy sector, we still think a lot of the services companies and a lot of the pipeline companies remain undervalued. A couple of other stocks like Johnson Controls JCI, a narrow-moat stock, high-quality company, Medium Uncertainty, trading at an undervalued level.
In that context, Treasury bonds are doing something investors have not seen in decades. In fact, a blog post from the Federal Reserve Bank of St. Louis says the implied “recession probability would be unprecedentedly high for a false positive.” However, the Treasury bond market — a recession forecasting tool with a near-perfect track record — continues to sound its most severe alarm in decades. Recessions have typically coincided with a substantial decline in the S&P 500.
Our favored real estate stocks include Realty Income, Ventas, and Federal Realty Investment Trust. Treasury yields finished mostly higher on Thursday after data showed the U.S. economy grew steadily this month. Treasury yields finished lower on Friday in the absence of any major U.S. economic data or appearances by Federal Reserve officials.
It is a company that we think is further along in their turnaround process and has a stronger profitability profile than Citigroup. However, the yield curve becomes inverted (starting high and sloping down as it mores right) when long-dated bonds pay less than short-dated bonds. Some investors hedge against recession risk by purchasing long-dated bonds to get guaranteed returns over an extended time period.
They have become mainstays in workplace 401(k) plans, Individual Retirement Accounts, college-saving 529 programs and more. Collectively, funds counted $25.5 trillion in assets at the end of 2023. The mutual fund industry is celebrating the centennial of the first such portfolio in the U.S., when Massachusetts Investors Trust first opened its doors in 1924. Few financial innovations have had more of an impact since then, especially for middle-class investors. What does boost returns is finding and hanging on to a relatively few big winners, Shannon determined.
Estée is one of these ones where it’s rarely ever traded at this large of a discount to our price/fair value. In fact, over the past 10 years, this may actually be the first time I believe that it’s traded in a 5-star category. I’d also note here that utilities, when we ran the numbers here a week and a half ago, were definitely becoming much more attractive than what we had seen. The utilities sector has really fallen over the past, I think, week and a half at this point. I think if you look at the Morningstar Utilities Index, I think year to date we’re down about 18% thus far. Now, utilities, of course, are going to be very correlated to interest rates.
While the Fed raised interest rates four times over the year, at their December meeting, officials signaled that no additional increases are expected and they will likely lower rates in the coming year. Our analysts put stock market performance trends, along with bonds and funds, into perspective—and look ahead with a fresh market outlook for 2024. Right now, the Atlanta Fed’s nowcast is projecting growth to surge to 4.9% in the third quarter, GDP growth on a quarter-over-quarter annualized basis. Our expectation is a bit lower at 3.9%, but that’s still a quite rapid rate of growth. What I would say is to not overreact to these quarter-to-quarter fluctuations in the growth rate because GDP growth is always noisy, and that’s certainly been the case in this pandemic and postpandemic recovery.
So, we’ve done this depending on what you need for your portfolio by large cap, by mid-cap, and on small cap. I would just note here for the small-cap stocks that we also included those that had a narrow economic moat. As you imagine, a lot of small-cap companies, it’s very difficult for them to be able to earn a wide moat under our methodology. Here’s what we’ve seen for returns by the Morningstar Style Box over the course of the third quarter and year to date. Of course, with as much as the market has moved over the past week and a half, we’ll start seeing some more negative returns or more negative in that slide on the left.
Utilities would be the one that I’m going to talk about a little bit more. That’s a sector that now has gotten to be very attractive, in our mind. It’s the sector that’s very correlated with interest rates. Then some of the basic-materials, consumer cyclicals, https://forexhero.info/ and real estate markets also selling off. The real estate sector, not only is that correlated with interest rates, but there’s also a lot of pressure there just because people do have so many concerns about the valuation for commercial real estate.
If we’re looking at Preston’s forecast for 2024 of 3.25%, it’d be a 150-basis-point rally in the long end of the curve. That certainly would be a huge boost to fixed-income returns next year as well. I do think now is a good time to certainly be moving further and further out on the yield curve.
The major stock indexes aren’t the only ones that have struggled. Small caps have been slaughtered, with the Russell 2000 sinking 25%. The Innovator IBD 50 ETF (FFTY), a key gauge for growth stocks, has plummeted 41%.
And then, we’ve had the Federal Reserve at the most recent meeting, a lot of their commentary, trying to intimate to the market that they think that they’re going to keep interest rates higher for longer. We think that the Federal Reserve not only are they going to not be raising rates, we think their next move is actually going to be to start cutting rates next year. With all that said, though, looking at our overall inflation forecast, you can see we’re expecting massive declines in durable goods prices over the next several years as supply chains continue to normalize. Likewise, we expect food and energy to generally be a negative impulse as conditions normalize in those sectors. Housing has been the final leg of high inflation that has sustained the inflation rate upward in 2023.
So, with the utilities, I’d note with as much as they’ve sold off, they’ve actually sold off more than even the U.S. The other thing to think about, what’s really driven the market thus far this year, I think about 70% of the total market returns have really been driven by those “magnificent seven” stocks. About 70% of the total market returns have really been driven by those ‘magnificent seven’ stocks.