By: Dave Chenet, CFA, CAIA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||4.17%|
Source: YCharts, Yahoo! Finance, WSJ
Recap of Aug 24th PCM Webinar with Nosh Engineer – VP Fidelity Investments
Last week we had the opportunity to sit down with Nosh Engineer – VP of the Capital Markets group at Fidelity Investments to discuss Fidelity’s economic and market outlook for the rest of 2023 and beyond (Link to the replay above). Nosh touched on many of the themes that we have been highlighting in this newsletter. Some highlights of Nosh’s comments were:
Inflation: Nosh noted that while headline inflation has fallen to ~3% as of late, core inflation remains well above 4%. Nosh expects headline inflation to catch-up to core inflation as higher gasoline prices and tight labor markets keep wage inflation elevated.
Fiscal/Monetary Policy: While the Fed has moved monetary policy to restrictive territory, fiscal policy remains loose with the fiscal deficit ~8% of GDP. Extended deficits must be funded by higher treasury issuance, pointing to upward pressure on interest rates, which in turn makes treasuries relatively more attractive to investors than stocks.
US Stock market valuation: Investors should be aware that persistently high inflation points to a lower Price/Earnings multiple for the S&P 500. Valuations trading more in-line with a higher interest rate/inflation environment will most negatively impact the “Magnificent 7” mega-cap technology stocks, however, some of those mega-cap stocks appear more attractively valued relative to respective earnings.
Non-US stock market valuation: While European economies continue to struggle through high inflation and energy concerns, they trade at attractive valuations. Emerging markets, especially, appear to have a tailwind of fundamental growth and attractive valuations.
We hope that hearing divergent viewpoints on the economy/market is helpful and we will endeavor to continue to hold these webinars to offer a view into our ongoing process of understanding and evaluating the investment thesis of some of the leading institutions on Wall St.
What We’re Reading:
Chart of the Week:
To support Nosh’s point about valuations and yields, this chart overlays the S&P 500 forward 12m P/E in blue with the Real (inflation adjusted) treasury yield in purple (inverted in this chart). Typically as real yields rise, stock valuations fall. 2023 has seen a rebound in market valuation but real yields rising above their 2022 peak. Markets seem to be betting on inflation falling and rates returning to low, supportive levels.