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Growth Team Weekly Investment Insights

After a few weeks off to handle quarter-end responsibilities, it feels good to catch up on what has been driving markets in October.

First off, from a higher level, it seems like the macro narrative from the third quarter has already shifted meaningfully, ultimately showing up in rates.

Inflation

• Inflation in Q3 included multiple readings that came in below expectations. However, the most recent September report was a bit concerning, as the MoM and YoY numbers for both the headline and core readings surprised to the upside. The YoY headline number even increased relative to August.

 

 

 

 

Labor Market

• Looking back at Q3, we had a very ugly July jobs report where we were expecting 175,000 jobs and only got 114,000. This led to investors feeling as though the Fed missed its window to ease and the labor market was falling apart. Jerome Powell used his Jackson Hole speech in August to signal an interest rate cut in September, and the Federal Open Market Committee followed through with a 50bps cut.
• However, in early October, we got the September jobs report that was quite robust, including adding 254,000 jobs versus 140,000 expectations. The ugly July print was also revised up from 114,000 to 159,000. Hourly earnings increased more than expected, and the unemployment rate fell to 4.1%.

 

 

 

 

The inflation reading and labor market resilience have called into question the future trajectory of interest rate cuts. Added to this have been expectations that rising election odds for Donald Trump increase the odds of more tariffs, tax cuts and other policies that may be inflationary and put upward pressure on bond yields.

Put it together, and the 10-year Treasury yield increased 50bps in October.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All Time Highs Are a Large Cap Thing

Big headline indices like the S&P 500® Index or the Russell 1000® Index have experienced a series of new all-time highs throughout the year. However, some pockets of the market have still not recovered from the late 2021 through 2022 market turmoil. For example, the Russell 2000® Index is still four percentage points away from recovering.

The makeup of the Russell 2000® Index is very different from the Russell 1000® Index. While the large-cap index is dominated by information technology, the largest sector in small-cap land is health care, and the sector is still down 41%!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Takeaways

We have had some earnings releases with interesting takeaways.

First, the big banks have pointed to a thawing investment banking business relative to a year ago, pointing to a recovery in IPOs and M&A. The Financial Times indicated $2 trillion in deals announced through the first nine months of 2024. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury goods struggle

The luxury goods market continued to report disappointing results, pointing to weakness in China.

• LVMH shares fell after announcing weak sales and an uncertain economic environment. Its sales declined for the first time since 2020. The company pointed to Chinese consumer weakness. Chinese shoppers, who have fueled much of the industry’s growth in the past decade, have reined in spending on worries about their country’s darkening economic outlook and weak housing market.
• Kering warned profits would almost halve this year after sales at the French luxury goods company’s main brand, Gucci (50% of sales), plunged amid weak demand in China.
• However, Hermès has been a bright spot, which continues to defy the broader global downturn. The company seems to have weathered the slowdown better than its rivals because it targets the wealthiest luxury consumers with long waiting lists for its most popular products.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Semiconductors

ASML sent shockwaves through the semiconductor market with its results. The company is the dominant provider of the precision chipmaking machines that foundries use to produce their most advanced chips.

The company reported net bookings were €2.6bn for the third quarter, far lower than the more than €5bn analysts had expected. The CFO pointed to a slow recovery in those chip markets that were not benefiting from booming demand for artificial intelligence (AI) computing infrastructure.

The company also expects its sales to China to fall next year, from almost half of revenues in the third quarter to “around 20%.” Shipments to China of ASML’s most advanced lithography machines have been restricted by the Dutch and US governments over the past year.

Perhaps these results shouldn’t have been a surprise. For multiple quarters now, it seems that semiconductor company performance has continued to be driven by exposure to the AI supply chain and China (given the slowing economy and export controls).  

While we don’t have the ability to quantify AI exposure, FactSet does provide information on revenue exposure by geography. Looking at the semiconductor companies within the MSCI ACWI Index, the average China revenue exposure is 42% and ranges from 0% to 100%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tesla

During the Tesla earnings call, Elon Musk said he expects vehicle deliveries to grow slightly in 2024 and predicted vehicle sales could increase 20%–30% next year. This marks a turnaround for Tesla, which has endured multiple disappointing quarters as concern spread about slowing global demand for electric vehicles (EVs).

The results sent shares soaring to the largest one-day gain since 2013. The one-day increase in Tesla’s market value of more than $150bn is more than the total value of Ford and General Motors combined.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Lithium

Speaking of EVs, there was recent news about the US approval of a large lithium mine in Nevada. Australian producer Ioneer received a federal permit for its Rhyolite Ridge lithium-boron mine, a project that could produce enough lithium to power about 370,000 electric vehicles a year.

This is the first approval of a lithium mine by the Joe Biden administration, which has offered Ioneer a $700mn loan to help build a project that would quadruple US lithium production when completed in 2028. Since 2002, only three US mines have come online for critical minerals.

There is no shortage of lithium in the US. The US Geological Survey said it found potentially enough lithium reserves located beneath southwestern Arkansas to meet projected 2030 world demand for car battery lithium nine times over.

Most of the world’s lithium is mined in Australia or extracted from large saltwater lakes in South America and then processed in China. But analysts said the mine approval and tax breaks were important steps in Washington’s efforts to incentivize the creation of a domestic lithium mining and refining industry to supply the EV sector.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

A Financial Times article on the commercial real estate market noted that analysts believe prices across the category that includes shops, offices, hotels and warehouses have fallen about 20% from the peak in 2022. Deal activity has been largely frozen since interest rates started to rise in March 2022, but predictions of a crash akin to the one that followed the 2008-2010 financial crisis have so far not materialized.

We believe the commercial real estate market may be bottoming as the rising interest rate headwind begins to ease. As these industry conditions begin to thaw, it could point to increased brokerage volumes.