The 1% Move Report

Wealth Management — October 31, 2024

• The S&P 500 decreased 1.9% Thursday to end the day at 5,705.45, having gained 19.6% thus far in 2024.
• Nine of the 11 S&P sectors were lower on the day, as Utilities (+1.0%) and Energy (+0.7%) were the strongest-performing S&P 500 sectors, while Consumer Discretionary (-1.8%) and Information Technology (-3.6%) underperformed.
• By the 4:00 p.m. equity market close, the US 10-year Treasury yield decreased to 4.28%; WTI Crude increased to $70.48 per barrel; and gold decreased to 2,747.83.

• US equities fell Thursday, capping a modest loss for the month of October, as megacap Tech companies' forward guidance proved disappointing, tempering investor enthusiasm for the AI theme, which had powered solid gains through first nine months of 2024. Uncertainty regarding next Tuesday's US elections also appeared to be weigh on risk sentiment, alongside evidence of re-accelerating inflation amid a still-robust labor market.
• The core PCE index, the Fed’s preferred measure of underlying inflation, posted its biggest monthly gain since April, increasing 0.3% in September and bolstering the case for a slower, shallower path for Fed easing. On an annualized basis, the core PCE price index rose 2.7%, slightly above consensus expectations of 2.6%, while personal spending also picked up.
• In advance of Friday’s critical nonfarm payrolls report, initial jobless claims declined last week to 216,000 (versus a consensus estimate for 227,000), the lowest level since May, while continuing jobless claims fell to 1,862,000 (versus a consensus of 1,897,000). Challenger job cut announcements eased in October, while hiring remained flat.

• The GIC recommends preparing for sideways-churning markets, neutralizing portfolio tilts versus benchmarks, and erring on the side of asset class diversification. With megacap and large-cap stocks likely continuing to trump small caps, add international exposure, stay neutral-to-underweight duration in rates and corporate credit, and use real assets and hedge funds to help mitigate emerging risks. Today's move does not meaningfully impact the GIC’s outlook. 
• Please find more information on the GIC's tactical positioning on the next two pages and reach out to your Morgan Stanley Financial Advisor to discuss portfolio strategies.

US: We recently look profits in US Large Cap growth equities redeploying proceeds into large-cap value and mid-cap growth stocks on the premise that rising odds of a successful soft landing will lead to market broadening.  This plus a brightening outlook for global growth in 2025 premised on ongoing enhancements to China stimulus programs suggests an improving outlook for cyclicals and we have a preference for financials and industrials. 2025 ambitious earnings estimates which imply 15% annual growth in profits are a risk but recent developments around labor markets and productivity dynamics could hold the key.

International Equities (Developed Markets): Given weak currencies and dovish central banks in Japan and Europe, economic rebound should be at hand. Developed market exposure should skew toward commodities and materials exporters, especially those in the Asia Pacific region, including Japan.

Emerging Markets: China stimulus while potentially insufficient to address the challenges of the secular bear market there are likely enough in the short term to help global trade and regional growth, especially as valuations in the region are more interesting than in the US.  Peaking US rates and, in turn, the US dollar, likely set up a second half rebound for EM ex China, given improving global growth dynamics. We favor Brazil, India and Mexico.

US Investment Grade: Stronger-than-anticipated economic growth is preserving the strength of corporate cash flows. While rates have backed up to reflect "higher-for-longer" expectations, yield spreads have remained well behaved. With geopolitical uncertainty high and equity valuations broadly rich, we like coupons of bonds with index-matching or shorter durations.

International Investment Grade: Yields are decent, central banks may soon cut rates and there is room for spread tightening as economic growth improves.

Inflation-Protected Securities: Real yields have sold off and are now bordering on cheap relative to the past two years. The securities could be a potential buy in a stagflationary environment.

High Yield: We have eliminated our exposure to the equity-like asset class to reduce equity beta of portfolios. High yield bonds rallied aggressively after the unprecedented provision of liquidity from the Fed and fiscal stimulus from Washington. However, currently, there appears to be limited upside and much downside to investments in riskier products, given the market environment.

REITS: We expect higher stock-bond correlations, which place a premium on the diversification benefits of investing in real assets. Nevertheless, with real interest rates positive and services inflation remaining quite sticky, we would need to be selective in adding to this asset class.

Commodities: Global reflation, tense geopolitics, especially in the Middle East, and ongoing fiscal spending suggest decent upside potential for precious metals and industrial-related commodities, including energy.

MLP/Energy Infrastructure: We previously increased exposure to real assets, with a preference for energy infrastructure and MLPs. Competitive yields and expectations for continued capital discipline amid stable oil and gas prices underpin our decision, as does hedging against geopolitical risks.

Hedged Strategies (Hedge Funds and Managed Futures): We recently added to equity hedged positions noting the pick-up in idiosyncratic risk, falling borrowing costs and rising volatlity. The current environment appears constructive for hedge fund managers, who are frequently good stock pickers and can use leverage and risk management to potentially amplify returns. We prefer very active and fundamental strategies, especially high-quality, low beta, low volatility and absolute return hedge funds

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.