Given the popularity of our weekly Market in Pictures, we started the habit of picking out a few and going into more detail with our PMs. In this edition, John Luke and Dave spend a few minutes on each of the following:
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- The Debate of 2025
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- Earnings Momentum and Recap
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- Cash Drag on Performance
3 Minute Read: Executive Summary
Full Transcript
Derek
Good morning. Happy day after Thanksgiving. We’re doing this last business day of November, just so we can start the new week and month fresh next week. But we’ve got our usuals here, Dave Wagner, head of equities, John Luke Tyner, head of fixed income. Thanks for making time on Black Friday.
John Luke
Yeah, of course. I hope everyone had a good Thanksgiving. Got a little cooler weather here in Memphis, but good times.
Derek
It did come in. Yeah, it kicked in here in Charlotte too late yesterday. It got a little wind kicked in and a little cold front came through, so.
John Luke
Nice.
Derek
I’ll do our usual disclosure up front and then y’all can tell us what happened in November and what to look forward to. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. The material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques, based on changing market dynamics or client needs. More information about Aptus’ investment advisory services can be found in its form, ADV part II, which is available upon request. November’s been pretty wild, a lot of activity, a lot of news, obviously. Kick us off.
David
It’s almost like an election happened during this past month and I think probably the best way to start this call is to kind of compare what we saw in 2016 to today and jump into the biggest debate, heading into 2025. And I’ll let John loop that. Obviously the debate on whether or not we’re going to have a soft landing or a hard landing. But if you look, and obviously this is, we’re filming this on Friday, the last day of the month for November. So all these numbers are finalized, but tangentially they are following the same direction in the market and the different asset classes on how the market performed after the 2016 election when Trump 1.0 happened. I mean, month to date, small caps, my personal favorite asset class, are up almost 11% versus the S&P 500 at 5.3%. So it’s almost doubling up plus some of the small cap brethren versus their larger cap peers.
Something I love to see. But then on the other side of the spectrum, international is absolutely getting those right now, the stronger dollars. Definitely hurting a lot of the performance on the international side, which I think might come at a surprise to many people, because people would expect Trump or want Trump to be the candidate of a weakening dollar. He would obviously prefer that from a growth standpoint. So we’ll just see how that plays out over longer periods of time. But man, what an awesome, amazing stellar month for equities as a whole. It was definitely something we’ve been talking about from the past few months, past few quarters on, given the monetary stimulus out there, the fiscal stimulus out there, that is really going to buoy this market really moving forward into the future. And obviously that dovetails into John Luke’s chart here on the soft landing versus hard landing.
John Luke
Yeah. So this is the seventh report they put out, kind of an update to this scoreboard, where they gauge the different metrics. Some of the big dogs manufacturing index, service index, a lot with retail sales and with jobs and continuing claims. And it helps give an idea of just the momentum of those numbers and how they’re shifting, sort of as time goes by. And what you can see is that you’ve got five soft landing sort of indicators, and one hard landing. But the one hard landing being the ISM Manufacturing Index, which has basically been in a recession for two years. You’ve seen manufacturing just be impacted by higher rates. You had some pull forward initially, I think after COVID, that helped, but just the higher rate piece has definitely impacted manufacturing. But kind of the key thing, at least as of now, is that manufacturing just makes up such a small percentage of our GDP.
Maybe that could change a bit with some of the Trump policies and reshoring, where it becomes more important, but really it hasn’t led to the recession that people have feared for the last two years and we continue to expect that to probably be the case looking forward. But where you do see strength, is within services, within the jobs market, within retail sales. The jobless claims, which is actually the bottom left, came out earlier this week with an even lower number, I think it was 213,000. So as that drifts to the south, I think it continues to solidify the market’s expectation for the likelihood of a soft landing. And as we’ve always talked about, the consumer makes up 70% of the GDP, the spending of the consumer. And as the consumer has jobs, as the consumer is making improvements in their real wages, which we also got an update on that data and it was pretty darn solid, that the consumer has money and the American consumer likes to spend it. So we’re continuing to monitor these and see if there’s any shifts, but really it’s kind of status quo, don’t you think Dave?
David
Absolutely, status quo. And I think when you’re looking at these six numbers, why are these six macro points chosen? And to John Luke’s point, it all comes back to growth, growth from the consumer, growth for manufacturing, growth of the consumer and their propensity to spend on services. That’s why we’re focusing on these six indicators. They’re just the absolute best indicators to look at the propensity of the consumer spend. And you’re exactly right, John Luke, it’s just status quo right now. What would you say, John Luke, given this information, what do you think the fed’s going to do in December?
John Luke
Yeah, that’s definitely tough. I mean, I think personally that they’re probably going to cut one more time and then kind of leave the slate empty to do whatever the data alludes them to, next year. I don’t think that Chairman Powell is the best of friends with President-elect Trump and doesn’t like being bullied around. So I would say he probably doesn’t want to feel like he’s catering to him. And if he could get a cut in now instead of after the inauguration, that maybe he can kind of feel like he gets a win.
Right now we’re like 66% chance of a 25 basis point cut. I’d say it’s probably 50-50 in reality. And the big take’s going to be the jobs number next Friday. You’ve got the meeting the 18th, and so they’re going to get some more data, they’re going to get employment, they’re going to get CPI, they’re going to get prices paid. So that’s definitely going to push it. But I would gear towards, they probably cut 25, just with the recent sort of not softening, but flattening of the labor market and they just don’t want to get behind the curve where you see a unemployment spike up to 4.2, 4.3 or higher.
David
It’s a pet peeve of mine to, John Luke, but whenever we talk about recuts, it’s always just so segmented. What are they going to do in ’24? What are they going to do in ’25? I honestly think that’s such the wrong way to look at this stuff, because obviously a business cycle is very dynamic and could care less about the Gregorian calendar. So I don’t think it really matters if we cut in December or not. I think we just need to continue to look at the data and the market shouldn’t make a decision like, well, I didn’t cut this one extra cut, we were prognosticating on in 2024, so we’re going to have the market pull back by any means. That’s just a pet peeve of mine.
But exactly, it’s such a tug and pull right now, John Luke, of where the labor market stands and the retail spending data is absolutely unbelievable. And as we know, I’ll show you a slide later on here talking about earnings season. Earnings season obviously starts off with large caps and goes to small caps, but then it actually transitions more to the consumer-based large cap names. And that’s what we’ve been seeing over the past few years. Walmart, Home Depot, Lowe’s, even Target, well, Target was a different story. Consumers strong right now and they’re spending,
John Luke
Yeah, the biggest point is that really neutral rates going to be much higher than what it was expected to be six months ago, even four months ago. And there’s probably going to be less cuts, because the consumer and the economy continues to be resilient.
Derek
Awesome.
David
And I think Trump’s okay with that. Sorry, to tie it all together. I’m usually just talking about how Trump is the nominal GDP growth candidate and given some of his immigration policy, his policies just to stimulate nominal growth. I think your point is exactly correct there, John Luke. Rates are just going to have to be higher, neutrality has to be higher moving into over the next few years. Pardon me.
John Luke
Yep.
Derek
And in general, I mean if you’re watching this video, you’ve probably seen John Luke’s post, but he did talk through a little bit and some of our partners have used this, some of our advisor clients have used this with clients, because there’s been a big confusion like, okay, hey, I’m reading that the fed cut rates, why are rates going up? And so, I think you did a really good job of walking through some of the expectations and how much of that is really… From what you’ve said and from everything we’re seeing, it’s not that there’s a fear of recession out there and that’s why they’re slamming rates lower. It’s just they built in a lot of excess and cushion for themselves to make sure the inflation didn’t come back.
And so taking a couple of those back, it’s not really a signal that they’re seeing anything dangerous out there. And so, markets are just embracing the fact that growth is pretty strong. If you haven’t seen the post, it’s a good one. All right, next one on here. Momentum has momentum. So it’s obviously been a good year, been a good two years. People get a little bit nervous when things go up, but I guess maybe they shouldn’t.
David
It’s kind of funny, definitely backwards. We all know human behaviors that we always want to climb that wall of worry. We always want to look at what’s going to drive the market lower or say like, hey, the market just simply can’t go higher. But think of how many times over the last 12 months, six months we’ve said like, hey, the market has to have some type of pullback, but any technological or technical chart, pardon me, you look at, just shows you that momentum begets momentum. And this is a great chart showing that over the last, let’s call it 50 years or so, when the S&P year-end returns after rising 20% year-to-date, what’s the return on the market the following year? I mean, I guess you could have said the same thing last year. I think about the S&P returned about 26% last year.
We’re probably up another 26% year-to-date, but it still just shows you that when the S&P 500 is up, this amount of time, heading to the end of November, the following year tends to be pretty good, or at least better than average. And that’s just something I would not want to bet against right now. Even though I think there’s a lot of overhangs in Washington DC on the fiscal side of stuff, whether it’s on corporate taxes and individual taxes, ACA stuff, the debt problem, but there’s structural forces at hand that have continued to drive this market higher over the last 12 months. They still remain right now.
So I don’t want to try to go out there with a crystal ball and say, hey, the market’s going to turn X, Y, Z amount next year. But all I want to say is that just follow the tape, follow what the market’s telling you, and it’s really hard to be short this market right now. And it goes back to one of our sayings that we were saying, it pays more to be patient than clever. And even right now, we said it six months ago and we’re going to say it again today, just don’t be clever, be patient. Let the market do the heavy lifting for you over longer periods of time.
Derek
Well, and it’d be a pretty tough time to see a significant sell off here at end of year. I mean, between the fed and the election and the momentum, you got pretty strong fact and just the normal seasonality of December, it’s hard to see where there’s going to be a big pullback right away.
David
It doesn’t mean it can’t happen.
Derek
It can happen.
David
I want to hedge that, but you’re right, the structural forces in the seasonality are definitely in play right now. The animal spirits are playing.
Derek
All right. So you mentioned earnings earlier. Walk us through a little bit what’s going on here?
David
So this chart, I think, does a great job. Because we always focus on every single quarter, like what we’re running for that quarter. And this chart does a great job, I think, kind of taking a step back and looking at earnings from more of a 50,000-foot level and looking at the trajectory of earnings over not a long period of time, but over a span of two, three years. And I think a lot of people forget that we were in what we considered to be an earnings recession for almost two years, spent another way for eight quarters when earnings basically did not go anywhere. There’s basically just a mismatch between slowing revenue growth from COVID spending fatigue, and then inflation coming into the picture in late ’21 and ’22 really hindering margins. But really ever since, I think it was what Q3 or Q4 of 2022, that was really starting to bolster to actually see earnings growth really start to skyrocket.
I would assimilate that there’s probably a correlation between the NVIDIAs and the artificial accelerated computing companies of the world really starting to get traction in CapEx, orders that has really boosted earnings over the last two years. And that’s always talked about how the S&P 500 has the best characteristic out there in the market and its operating leverage. The characteristic that no other market or major asset class has out there in the world, like small caps are services based, international services based, emerging market’s going to be more commodity based, not just on the energy side, but on the value additive services within the technological sector, on the EM side, you just don’t get operating leverage. And I think this is just something that every domestic US investor needs to be proud about this characteristic of operating leverage and just looking at tangible data, hard data, what that can do to earnings over longer periods of time once you start to get some type of revenue growth.
I mean, if you look at earnings for next year, you’re supposed to have top line revenue growth of percent, earnings growth of 15%. That’s the definition of economy to scale that for every one input, you get more output, that’s operating leverage, that you can grow revenue of five percent, income at 15%. I don’t know what’s going to slow that down, because the CapEx spend within a lot of the tech side is really just not slowing down. We saw that again just this past quarter. Whether you look in the video, you look at Google, Amazon, Meta or wherever, it’s really just hard to bet against America. And I hate saying that phrase, because I’m not the biggest Buffett fan. I think he’s not a charlatan by any means. I think he’s ever pontificated, but he’s not wrong here. It’s hard to bet against America, especially when you have these structural forces hands and the characteristics that constitute how the S&P 500 is constructed.
And we’ve just had great earnings growth. It took two years really of slow no growth, because of a few exogenous factors with inflation and COVID fatigue. But we’ve really just seen a launch of earnings expectations moving forward in the future. But the best thing about it is that everyone says all these expectations always are lofty and we’re not going to hit them. Well, you know what this chart shows you? It shows you that we keep hitting these lofty expectations time and time again over the past two years.
John Luke
Yeah. And I think on that, some of the banter about just valuations being expensive, well number one, if you look at the average stock versus the MAG 7, the valuations aren’t quite as expensive. But if you get any remote growth, like what’s expected for next year, you quickly grow into that multiple and actually makes the market look pretty reasonable.
David
Plus tax cuts, 21% corporate tax rate, to 15% tax rate.
John Luke
And that helps the average stock, big time on the average stock.
David
Yeah, think about the average tax rate of the MAG 7, especially the benefits they can get from know CapEx. I mean, I told you before that small caps and more, you assume like this to the remaining 493, they’re more of a services based economy, so they don’t have the ability to write off CapEx spend like a lot of these larger manufacturing companies do. So they’re a bigger beneficiary from tax cuts. And that’s why in a way, small caps are up 10.5% month to date in November. And large caps, which are obviously the top 10% account for 38% of that index, is only up 5.3%.
Derek
Now, I would say in this graphic fourth quarter, all the way to the right, fourth quarter estimates are still really strong, not quite as strong as they had been coming in. Is that more just a feature of expectations being a little bit ahead of themselves and people getting a little bit too giddy coming in?
David
I would say, yeah. I’m kind of blanking. I shouldn’t be blanking on this, on kind of what the scapegoat is on why those earnings expectations have really started to kind of come down. I’m not too sure actually on that.
Derek
Well, I mean 10%-
David
Did you [inaudible 00:17:48] me?
John Luke
Look at Q1, Q2, and Q3, all expectations were lower than what was actually realized. So maybe that’s just a little bit of a catch-up too.
Derek
Yeah, and it is just a big number coming in. I just think it seems like probably some catch-up, where the estimates had gone a little bit higher than maybe were warranted.
David
I would say that there’s a misnomer or something that’s misinterpreted in the market right now. Everyone’s saying that the MAG 7 earnings are coming down. On a year-over-year basis, they’re coming down, no doubt about it. I mean, that’s just the law of larger numbers and the laws of math. When you’re growing earnings at 60% four quarters ago, 57% three quarters ago, two quarters ago is like 29%, 27% last quarter, the bar is so high, you can’t keep up with that growth on a year-over-year basis. That doesn’t mean that the growth is slowing down by any means whatsoever. So I still see strength in that whole space.
Derek
Absolutely. All right, well we added a fourth bonus chart this month, which was a cool chart, just because people do tend to ask about holding a little bit extra cash when markets are high. And is that a good buffer? So obviously I guess you guys [inaudible 00:19:14].
John Luke
Yeah, mathematically, especially if you extend the time horizon, hold too much cash can be very costly. And I think too, when you run actively managed hedged equity strategies, it gives you a little bit of a better cop-out to invest when you feel like markets might be stretched. Whether they are or they aren’t, at least you’ve got the ability to sleep at night. And so, I think what we’ve been really trying to push is for the clients that want to kind of hoard that cash, but really can’t afford to long-term, that there are some good solutions to get the money to work and have an option that allows them peace of mind, because you compound these numbers, it really starts getting pretty brutal over that 10-year mark.
And I know we’ve talked to a number of clients that they basically held cash the last four years and waited until the day after the election to get money deployed and that cost them what? 80% plus with just S&P returns. And so, I think just looking at these and getting a client to think about things more than just what happens tomorrow and more about what happens in 10 years, can really help push them to make better decisions.
Especially as you come into the end of the year, you’ve got a couple years in a row with market returns that have been pretty unbelievable. But just like Dave said, with President-elect Trump being kind of the pro-nominal growth. And then also remember, every press interview he did while he was president, look at the Dow, look at the S&P. That’s his key line and he gauges his performance based on what the markets do. And so, I think not only do those factors exist that we’ve talked about, but also when you’ve got the president that basically grades himself daily on how the market’s doing, it’s just hard to think that he’s going to be thrilled if markets draw down at all. He’s probably going to continue to jawbone the market higher or try to, because that’s what he’s run on.
David
That’s just the most important point on this call, John Luke, look what happened in 2018, I mean, you used a perfect word there, jawbone. What he was trying to do with the fed back in 2018 when the market went down almost to the technical recession level, down like 19.9% from August 23rd to legitimate December 24th, 2018. And you’re exactly right, he’s going to do whatever he can to make sure that this market does not go down.
Derek
Yeah, well, and the cash thing, we’ve just seen it over the years, there’s so many things need to go right when you make a proactive decision to raise cash. I mean obviously, when you do that you need markets to not go up too much, because otherwise it gets away from you and then you have to have a mechanism for when you’re going to redeploy that cash. So it’s a losing game and this chart is really stark, to see how it just compounds over time, that mistake.
John Luke
Also doesn’t account for the taxes that you’re paying on the cash rate that you’re getting, where with ETFs, you’re deferring. So who would make it even worse if we had Brian to build us a chart on real returns, real and after tax.
Derek
Awesome. Well guys, thanks for coming on on Black Friday. I know it’s a short day for the market and hopefully everyone out there had a great Thanksgiving. These guys, I’m sure over the weekend we’ll be loading up all the month end stuff and we’ll get our normal monthly note out early in the week and we appreciate y’all.
John Luke
Thanks guys. See you in December.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2412-1.
