Twice As Hard

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Over the past 12 months, investing has been easy if you just bought AI-related stocks. Moving forward, companies may find profits harder to generate and consumers may find earnings harder to come by. That doesn't mean investors will be unable to generate returns. But, proper asset allocation should be in focus. The 1990 song "Twice As Hard" is the inspiration for this week's musings. Here's some trivia about the song:

The song reached #11 on the billboard charts.
It was one of the top-performing singles from their debut album "Shake Your Money Maker." However, "Hard To Handle" and "She Talks To Angels" were the only two hits from the album to reach number 1.
The song was written about how hard it is to leave someone, and even harder the second time.
The album reached number 4 on the charts and sold more than 3 million copies worldwide.
For what it's worth, Black Crowes lead singer Chris Robinson has had an interesting private life. In 1996 he married Lala Sloatman, niece of musician Frank Zappa. After their divorce, he married actress Kate Hudson in 2000, which ultimately led to a subsequent divorce. In total, Robinson has been married 4 times - maybe saying goodbye isn't that hard...for some.

"Clean as a whistle
Smellin' like a rose
She got no dirty little fingers
Bloodshot eyes are gone
Tell me I"m wrong

Twice as Hard
As it was the first time
I said goodbye"

Here's what we've seen so far this week...

Twice As Hard. As most of the "easy" money has been made in equities this year, it's likely that returns may be harder to come by for those companies that have thrived so far. Earnings are what drive stock prices from a fundamental standpoint. During the 3rd quarter, analysts lowered EPS (earnings-per-share) estimates by a larger margin than in the past. The Q3 EPS estimate declined 3.9% for S&P 500 companies, while the average EPS quarterly estimate decline has been only 3.3% over the past 5 years and likewise over the past 10 years. Most analysts cite a "possible economic slowdown" as their primary reason for the downward revisions. If we look at the net exposure among Hedge Funds to Mag 7 names, it would appear the party may be over in that particular group. Net exposure to Mag 7 is the lowest among Hedge Funds since the middle of 2023. As we have previously noted, Mag 7 names peaked on July 10th of this year and, while off the lows, is struggling to make it back to its prior peak. Meanwhile, sectors such as Utilities, Real Estate, Industrials, and Financials have not only out-performed Mag 7 stocks over that time frame, but are positive since July 10th. Markets are also adjusting this week to the idea that another 50 bps rate cut is likely off the table. In fact, this week futures are showing a 0% probability of a 50 basis point cut and even a 13% probability of no rate cut in November. Just for the record, we are not in the camp of no rate cut as it would send a confusing message to Wall Street given the current Dot-plot indicating two more cuts this year. So, investors can make it hard on themselves by being over-concentrated or they can diversify into this current market consolidation.

Not Everything Is Smelling As A Rose. Last week's labor report surprised most of Wall Street with a higher number of jobs added than was expected. However, we don't think that the situation is as "rosy" as the report may have suggested. The Kansas City Fed's "Labor Market Conditions Index" is at its lowest level in more than 3 years and has declined in 9 of the last 14 months. While the level of the index is still positive - indicating that labor conditions are above long-term averages, it is clearly on a downward slope indicating that labor market activity is on the decline. At the same time, Initial Jobless Claims saw a large move higher this week and reached a level not seen since June of 2023. As we've noted before, typically claims need to reach a weekly level of 300k+ before we become too concerned about recessionary indicators, but we'll be keeping an eye on claims moving forward to see if this becomes a trend or perhaps the numbers get adjusted lower. On the Inflation front, there was good and bad to take away from this month's Consumer Price Index report. While the month-over-month number did come in slightly higher than expected (+0.2% vs +0.1%), the year-over-year trend declined from 2.5% last month to 2.4% in September. The sticky element to inflation remains insurance - auto to be specific. However, basic food necessities - fruits & vegetables, dairy, bakery, & foot at home - are manageable. What's interesting in the report is that Food Away From Home (3.9%) is running higher than the historical average of inflation (3.5%). That can explain why a recent survey of consumers indicated that dining out may be trending lower. When asked how dining habits have been affected by higher prices, 56% of respondents in the most recent survey indicated they would be dining out less. Despite the actions taken by the Fed, consumers are continuing to make adjustments to their spending patterns. This is also evident in the fact that interest rates on credit cards hit a 20-year high. We believe this is causing consumers to cut back on spending, especially in terms of adding more debt to their personal balance sheet. The report on Consumer Credit came out this week showing a 66% decline in spending. The prior month had shown a rebound in credit spending, but if we take out the August data, credit spending has been in decline for most of 2024. Again, we're hitting the panic button yet, but the economic data needs to be carefully watched at this point.

Saying goodbye, at least to the "easy" money, is hard...
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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

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Past Performance does not guarantee future results.