Services spending is providing a boost to economic growth

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Services spending gives economic growth a boost
• Bond yields at attractive levels for income-based investors
• On pace for record setting buybacks & dividends

Happy Turkey Day! As we approach Thanksgiving, it’s the perfect time to reflect on all we are grateful for. From an investor’s perspective, this year’s bear market will certainly not make this list. But even though it has been a challenging year performance-wise, we still believe that investors have a cornucopia of economic and financial market blessings to count! Before we celebrate with family and friends, we’re sharing our Top 10:

• #1: Doesn’t Get Any ‘Butter’ Than Being Back Together | This time last year, the worst wave of COVID yet was just around the corner. Now, mitigation efforts, vaccines and less severe strains are allowing most of us to gather in person for the first time since the pandemic began. While cases may rise during the colder months, the days of shutdowns and restrictions are hopefully behind us. And that is worth celebrating.
• #2: Both Parties Brought To The Table | We won’t be discussing politics at the dinner table, but the fact that the midterm elections are behind us is a positive for the markets. Following the 19 midterm elections held since 1945, the S&P 500 has been up ~14% on average in the 12 months following and has been positive 100% of the time. These results are regardless of the outcome and should be pleasing to both sides of the political spectrum.
• #3: Services Spending Leads The Consumer’s Parade | As TSA screenings, restaurant bookings, and hotel occupancies recovered, services spending became a significant contribution to economic growth. Just think of all the memories we created during the Summer of Revenge Travel. The good news is that the desire to be out and about hasn’t faded, and this was confirmed by many CEOs (particularly airlines, restaurants, and hotels) during the 3Q22 earnings season.
• #4: Labor Market Feasting On Job Gains | The calls for a 2022 recession have proven to be premature. Why? We’ve had a hot labor market with nearly 4.4 million jobs created year-to-date and an unemployment rate near record lows. Healthy employment dynamics is one factor that should limit the severity of any potential recession in 2023.
• #5: Inflation In The Process Of Trotting Lower | Finally! Inflation is in the process of a substantial move lower. The supply chain backups are healing, retailers are discounting, and even rents are moving lower. Slowing inflation will cause the Federal Reserve to be less aggressive and should be a positive for both the stock and bond markets moving forward.
• #6: Lower Gas Prices The Right Stuff(ing) | Earlier this year, the national average gasoline price per gallon breached $5 for the first time. This sharp increase was badnot only for inflation but also consumers’ pockets. Fortunately, the price has since declined over $1.25 per gallon – providing significant relief, especially for low-income households.
• #7: Higher Yields The Gravy On Top For Income Investors | There is now an alternative: After years of low interest rates, bond yields are at attractive levels. In fact, at ~6%, high quality corporate bond yields are near the highest level since 2009.
• #8: Investors Gobbling Up Attractive Valuations | The S&P 500’s P/E multiple (next 12-month basis) is trading below its five-year average. If earnings continue to come in better than feared, equities would be even more attractive at these levels.
• #9: Harvesting Record Dividends & Buybacks | Dividends are expected to hit a record high this year, and buybacks have already reached an annual high–and the year isn’t even over! In fact, buybacks are on pace to exceed $1 trillion for the first time ever. Over time, actions such as these should increase the attractiveness of equities.
• #10: Seasonality As Sweet As Pie | There have been few places for investors to hide this year, but if it brings any comfort, the year may end on a better note as the S&P 500 has tended to close the year strong. In fact, from November 15 to December 31, the Index has rallied ~2% on average, and has been positive for both nine of the last ten years and for 17 of the last 20. That would be a sweet way to end an otherwise challenging year.

The American Farm Bureau Federation indicated in their annual report that the cost ($64.05) of a Thanksgiving Day dinner for 10 people (plus leftovers of course) is up 20% from last year. While our budgets may not be thankful for this pricier feast, I think we are all willing to pay a price to be surrounded by our nearest and dearest for the holiday once again. Above all, we are grateful for the opportunity to share our outlook and investment insights with you. On behalf of Raymond James, we wish you and your families a Happy Thanksgiving, and we hope you have many reasons to be thankful this year and all the years to come.

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