What comes next is a big question at the best of times.
However, in a week that contains a US Presidential Election, three key interest rate meetings (the RBA , the Fed, and the Bank of England) alongside a raft of earnings news, it's almost impossible to answer that question holistically.
Not least because, as the NewYork Times reported at the weekend, polling conducted by the paper suggests that Democratic candidates for the Senate (the upper house in the US parliament) are outperforming Presidential candidate Kamala Harris.
That implies that voters are inclined to split their loyalties, by for example, voting for Donald Trump as President, but going with a Democratic candidate for their Senate seat, where that's applicable.
As only 34 Senate seats are up for grabs in this election.
Data like this makes the outcome almost impossible to call ahead of the event. The US election takes place on November 5th, given how close the polls have been, the full and final results of the contest may not be clear for some time every vote is likely to count.
Base rates to move lower
The Federal Reserve is expected to cut US interest rates by 25 basis points or 0.25% on Wednesday. The Bank of England could follow suit on Thursday, though their Monetary Policy Committee could hold fire if they are concerned about the effect of increased government spending on the rate of inflation, following on from last week's budget.
As has been the case in the US recently, UK Government Bond yields (the implied cost of government borrowing) have risen to reflect the markets concern about increased government spending.
Much of which will be funded through new debt issuance.
The market’s view right now is, if you want to borrow more, then fine, but you must pay for the privilege.
Source: Trading Economics
Unexpected reactions
Jobs data in the US, released on November 1st could indicate that the US economy is slowing.
The 12,000 new jobs it created was way below forecasts of 113,000 new jobs, and the rolling 12 month average gain of 194,000. Although, for now at least, the unemployment rate in America, remained unchanged at 4.10%.
Source: Trading Economics
Consumer Discretionary stocks reacted positively to the weak jobs data, rallying by +2.40% on the premise that a weaker labour market means further interest rate cuts, which could mean a higher level of disposable income for consumers.
Though to my mind we seem to have overlooked the other side of that equation. Which is that if lower job creation numbers are the new trend, then, ultimately that will lead to job insecurity, which in turn could mean that consumers tighten their purse strings, rather than loosening them.
Source: Barchart.com
As they say it takes two views to make a market.
Unhealthy performance
A sector that's always in focus in the US around election time is Healthcare.
That’s not surprising when you realise that Healthcare spending in the US is thought to have hit $4.80 trillion in 2023.
Up from 4.50 trillion, or $13,500 per capita, in 2022.
US healthcare spending is forecast to reach as much as $7.20 trillion by 2031, growing by a compounded 5.50% per annum.
Historically, the Democrats have tried to make healthcare provision more widespread and affordable, often at the expense of the margins of drug companies and healthcare providers. Whilst the Republicans have adopted a more free market approach.
The S&P 500 Healthcare sector has underperformed the S&P 500 over the last 12 months, and across shorter time frames too, as we can see below.
The sector has underperformed the wider index by around -50.0% over the last year, and by considerably more than that, over the short term (see the bottom right hand chart)
Source: Barchart.com
I wonder if that underperformance is justified or has it gone too far?
If we look at the chart below, from US investment bank Jefferies, we can see why I am thinking like this.
The chart plots the trajectory of earnings revisions, over the last three months, for all S&P 500 sectors.
Earnings revisions are simply the change in estimates of company earnings, by Wall Street analysts, which they revise lower, if they are bearish and higher if they are bullish.
As we can see, revisions to forecasts, for Healthcare sector earnings have slipped into negative territory over the last three months. However, they are far from the worst offender, with Energy, Autos and Materials taking those slots.
Source: Jefferies Research
The next chart is the S&P 500 earnings dashboard, as of November 1st, courtesy of LSEG.
Blended earnings growth (a combination of earnings reports and earnings estimates) in the Healthcare sector is running at some +13.0% in Q3, whilst revenues have grown by +9.3%.
40 Healthcare companies had reported earnings, by the close on November 1st, and 90% of those had posted an earnings beat, with 78.0% beating on revenues.
Source: LSEG
They aren't the best numbers on the street, but they are nowhere near being the worst either.
What’s more, the defensive nature of, and forecast growth in, US healthcare spending, should actually make the sector attractive, relative to many of its peers, if the US economy is slowing. Though that’s not my base case.
Based on this I will be watching the sector, and its constituents, over the coming days, looking for catalysts and possible positive reactions to them.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.