Understanding the current market landscape: Opportunities and trends
Denise Chisholm’s sector watch – October 17, 2024
The equity markets are responding to various factors, from earnings momentum to new U.S. retail sales data and the European Central Bank’s recent rate cut decision. Despite these global and domestic headlines, the North American job market remains a focal point for policy makers, especially central bankers. Here, we explore how the current trajectory of jobs affects the markets and identify the sectors poised to benefit.
Retail sales and inflation: A balanced outlook
Recent retail sales data present a mixed picture. Some argue that the consumer sector is either weak or overly strong, leading to inflationary pressures, but the truth lies in the middle. Over the past two years, real retail sales have shown slight contraction, stabilizing without significant movement. However, recent months have seen a pickup in real retail sales as inflation decelerates, leading to positive – but not necessarily inflationary – momentum.
Real income growth and economic stability
Following the quasi-recession of 2022, characterized by stagnant job markets but no significant job loss, the U.S. economy is stepping into a multi-year recovery phase. Real incomes, which turned positive as inflation decelerated, have placed the U.S. consumer in a more favourable position. This recovery suggests a “hard soft landing,” or a “soft hard landing,” marked by contraction followed by recovery for wages and profits.
Job market dynamics: A pause that refreshes?
Current data show job growth slowing to what some call “stall speed,” with annual growth at 1.6%. This deceleration, however, might indicate a potential reacceleration of job growth. Historical patterns suggest that periods of low job churn often precede growth spurts, because employers eventually need to address accumulating projects. If this trend continues, it diminishes the likelihood of a hard landing, offering a more optimistic outlook for the equity markets.
Housing market: Time and churn over mortgage rates
The housing market’s dynamics are influenced by price, mortgage rates and time. Interestingly, time spent in a house plays a more significant role in supply movements than mortgage rates. Typically, after three to five years, homeowners are more likely to move, spurred by increased incomes and changing needs. That could help balance demand and supply, thereby restraining inflationary pressures in housing.
Productivity and AI: The potential for growth
Productivity gains are critical for economic cycles, and the U.S. is currently witnessing above-average productivity growth. This possibly reflects the early impact of new AI technologies; historically, new technology has been a boon for productivity and, by extension, for the stock market. Sustained productivity could mean a unique economic scenario of robust real GDP growth coupled with controlled inflation, presenting a favourable environment for investors.
Sector opportunities
Consumer discretionary
Earnings growth in the consumer discretionary sector has been robust despite its underperformance in the S&P 500 Index. However, in broader indexes like the Russell 3000 Index, this sector has shown resilience. Given the low valuation levels and strong earnings, consumer discretionary stocks could offer substantial upside potential.
Financials and real estate
The financials and real estate sectors have shown positive trends, bolstered by lower interest rates and increasing earnings growth. Financials, in particular, has outperformed year-to-date, indicating strong fundamentals. Real estate, especially commercial and multi-family housing, is seeing improvements, suggesting potential for further growth as bad news begins to moderate.
Interest rate-sensitive sectors
Interest rate-sensitive sectors, including financials and real estate, are positioned to benefit from rate cuts. Historically, these sectors perform well prior to U.S. Federal Reserve rate cuts, and they are likely to do so again if current trends continue.
Conclusion
Emerging from a complex economic landscape, the market shows signs of resilience and potential recovery. With productivity gains, stabilizing retail sales and positive job market data, there are several sectors, especially consumer discretionary, financials and real estate, that are positioned for growth. Investors would do well to watch these trends closely, because they may provide valuable opportunities in the evolving market landscape.
