Private Wealth

Weekly Research Briefing: The Hillcrest Into 2024 Fast Approaches...

November 14, 2023

Less than seven weeks until the end of the year. Take out the two to three holiday weeks and you are down to about twenty days of real work left in 2023 for the markets. The M&A strategic and opportunistic deal train will begin to slow significantly as will the corporate information from companies to the investing world. The economic data will continue to flow, and the Fed members will continue to bare their teeth at anyone who mentions inflation, but for all intents and purposes, we know where we are going to end up for 2023.

With that being the case, the 2024 projections should begin to hit your inbox at a rapid pace. From the early reads, it looks as if the strategists and economists are narrowing in on a soft-landing or no-landing scenario for the U.S. And with inflation continuing to slow and household and corporate balance sheets remaining in good shape, the investment outlooks are favorable towards fixed-income and equity holdings. Some lean more toward international stocks, most towards smaller cap companies, and many feel safe to own credit over risk-free bonds. Of course, as always, all bets are off if a geopolitical event occurs or if the U.S. government shuts down for an extended period. But for now, things look to be in better shape today than one-year ago.

While your stack of reading grows with 2024 outlooks, this week's news on the tape will give you plenty to chew on and consider. It is inflation week with the CPI dropping on Tuesday before you read this issue of the WRB. +0.1% core should be in store but who knows with the adjustments to this volatile series. The PPI will help to confirm the reading on Wednesday. But this week we will also see Retail Sales, Industrial Production, the NAHB, Housing Starts, Building Permits as well as the Empire, Philadelphia and Kansas City Fed data. Big retail earnings from Walmart, Target, Home Depot, Lowes, Macy's and TJX will also provide plenty of information on the consumer economy. Lastly, the list of Fed Speakers continues at a record pace with many of them double booked this week.

Next week is Thanksgiving so we will take a week away from writing and publishing. I'll dig into my new stack of outlooks and see what stands out and pass it along. Have a great holiday.

It is inflation week, and the trend continues to be the friend of the Federal Reserve and investors of risk-based assets...

As the core PCE falls towards 2%, the question remains if it will hit the Fed's goals or bounce. Only time will tell.

2024 Inflation Outlook: Final Descent

Inflation has fallen sharply from its pandemic peak and should begin its final descent in 2024. Core PCE inflation is down from a 5.5-6% to a 2.5-3% sequential annualized pace (Exhibit 6), and other measures of the underlying trend such as the trimmed mean and the median have softened significantly as well.

Goldman Sachs

As Goldman Sachs lays out, there are weaker prices ahead in the form of auto and shelter costs which are significant weightings in the consumer inflation readings...

We see further disinflation in the pipeline from rebalancing in the auto, housing rental, and labor markets. In the auto market, it took longer than expected but eventually fixing supply chain problems, restoring production to normal levels, and rebuilding inventories reintroduced competition among dealers and manufacturers that has begun to reverse shortage-driven price spikes. Inventory levels have more room to recover in 2024, and new and used car prices have further to fall (Exhibit 7, left).

In the housing rental market, normalization of elevated pandemic demand and a large increase in apartment supply has slowed leading indicators of new tenant rent inflation to a 1-2% annualized pace this year (Exhibit 7, right). The official housing inflation numbers have slowed less because they also cover continuing tenant rents, which fell behind the rapid growth of market rates in 2021 and 2022 and have been catching up. But we estimate that the gap between market rates and continuing tenant rents has fallen from 7.5% to around 2%, meaning that catch-up is coming to an end and the official numbers should converge more quickly toward the slower pace of the leading indicators next year.

Goldman Sachs

It is not a core price item, but anyone needing a pit stop is going to see much lower fuel prices...

Gasoline is not a major component to most consumers, but for those with a long commute in an ICE vehicle, you are seeing a current benefit to your wallet.

The Daily Shot

Gluten lovers should also feel a fatter wallet...

If you are a lover of rolls, sandwich bread, croissants, or ramen noodles then enjoy the lowest prices in two years as global grain stores are full and U.S. grain exports are the lowest in twenty years.

The Daily Shot

And all meat prices should benefit from decade low corn exports colliding with a bumper U.S. crop...

Chicago corn futures on Monday hovered near three-year lows as the market absorbed last week's U.S government forecast that farmers will produce the biggest corn crop on record this year.


The Daily Shot

"Objects in mirror are closer than they appear"...

Unfortunately, many vocal consumers have tossed their reading glasses in favor of their cars' sideview mirrors.

In fact, many economic sentiment surveys have become nearly worthless as they don't reflect actual behavior...

As it turns out, the big economic story of 2023 is not a recession, as many had predicted — it’s the disconnect between consumer sentiment and behavior.

Higher than normal inflation over the past two years is an obvious reason that people would be down about the economy. The puzzle is why people are still behaving as if their economic situation is good. Inflation-adjusted consumer spending is way up: Not only above 2019 levels, but above the pre-pandemic trend. In fact, it’s largely the reason that US economic growth is above expectations. And yet consumer sentiment is at levels typically seen only in a recession.

Economists tend to believe actions over words. You can insist that you prefer a vegetarian diet, but if you keep eating hamburgers, we will conclude that you actually prefer an omnivore diet. So if you say the economy is terrible but spend like it’s 1999, some economists will tend to trust what you do over what you say — and question the reliability of the polls.

These economists argue that the data showing a strong economy, including outsize consumer spending, imply that people are not being honest about how they feel about the economy. Instead, they are aligning their views with their political preferences. This argument maps on to the large disparity between Republican and Democratic views of the economy, a gap in attitudes that is not matched by a gap in their economic experience.

While inflation is the obvious pain point in the economy, it has also been substantially reduced — from a high of more than 9% last year to 3.7% today. Hopefully it will continue its decline, but the current rate is within historic norms for the US, and even a bit lower than it was in 2011.


The inflation slowdown is not only a U.S. phenomenon...

Encouraging news for risk-based assets overseas as those Central Banks follow the map that the Federal Reserve drew up.

Goldman Sachs

And because natural gas is such an important input into paying for European winters, we would highlight that the current tanks haven't been this filled in the last 10 years...

The Daily Shot

Given the European weather outlook, natural gas prices may have only one downward direction this year...

Europe’s winter forecast pointing at an unseasonably warm outlook, which will likely reduce the need for heating fuels over the coming months.

BofA Global

Speaking of Europe, have you even tried to book a trip overseas for 2024?

If Taylor Swift and Beyonce were the hot tickets in 2023, I think a coach ticket from the U.S. to any European city destination will be the tough find for 2024. After talking to a vacation travel company last week, all I could say is, plan ahead and be flexible.

Apollo Academy

Here is a good gathering of the NFP payroll estimates for 2024...

Remember when not too long ago some firms were projecting negative monthly results? Well, not anymore. First up Goldman Sachs.

Goldman Sachs

Then Morgan Stanley...

@carlquintanilla: MORGAN STANLEY: “We expect nonfarm payrolls to fall below the replacement rate in 1Q24 – decelerating from an average 233k/month in 3Q23 to:

  • * 150k/month in 4Q23
  • * 110k/month in 1Q24.
  • * 70k/month in 2Q25. #NFP

And on the lower (but still positive) side, BofA Global/Merrill Lynch...

BofA Global

High growth and inflation from COVID/Ukraine sent the Treasury market into its longest and sharpest drawdown in ninety-seven years...


But as the stars lined up two weeks ago for lower inflation, steady growth and a more dovish Fed, investors fast-forwarded into credit funds...

The Daily Shot

The last hike was at the end of July, so you want to look for the lines titled 3m & 4m in the below table...

@dailychartbook: "After the final Fed hike, bond yields always fell." - JPMorgan

Another reminder that the smartest CFOs and Treasurers were acting well ahead of the rise in rates as they refinanced and extended their company's debt at historically low rates...

@dailychartbook: "US nonfinancial corporates’ net interest payments as a percentage of profits after tax have declined from 18.1% in 1Q22 to 11.9% in 2Q23, the lowest level since 2Q59." - Jefferies, Christopher Wood

As a result of the Finance team's actions, corporate bankruptcies are much more controlled than anyone would have expected after a 400-basis point jump in the risk-free rate...

@SPGMarketIntel: S&P: “.. a total of 50 companies filed for bankruptcy in October, down from 61 in September, according to the latest S&P Global Market Intelligence data. This was the second-lowest monthly total for the year so far ...”

Last week's Senior Loan Officer Opinion Survey on Bank Lending showed an improvement in credit...

@BittelJulien: Latest SLOOS reported fewer banks tightening credit standards on C&I loans. Yes, conditions remain tight but what’s important here is that the worst of the tightening is behind us and this is what equities started to price in back in Q4 ‘22 when the liquidity cycle bottomed.

With the big earnings largely behind us, one can see why investors prefer to lean into big technology companies...

But while the big companies continue to deliver and get rewarded, at what point do valuations come into play? "Alexa, what was the 'Nifty Fifty'?"


Interestingly, the 'Magnificent Seven' was not just a U.S. event...

Europe also had an outperformance concentration at the top of their market. Asia even had a small one, although the returns were negative. It even existed in Japan - though if you were overweight Japan, congrats.

Goldman Sachs

Today, five companies have a bigger weight in the S&P 500 then Apple did 10 years ago...

Here is a glance at the increase in concentration over the last 10 years. I also added the 10-year performance for the 'Magnificent Seven' just so you can see the level of outperformance.


So much for my thoughts of a broadening market during the recent summer months. Time to test the 2020 low in breadth...

@LizAnnSonders: Getting much closer to retesting September 2020 low for ratio of equal-weighted S&P 500 relative to cap-weighted S&P 500.

Another milestone as Microsoft becomes the second company to become worth more than the entire market cap of the Russell 2000...

@bespokeinvest: Microsoft $MSFT has joined Apple $AAPL as the 2nd individual company that has a bigger market cap than the combined market cap of all stocks in the small-cap Russell 2,000:

Speaking of U.S. small cap companies, their relative performance to the S&P 500 is approaching 23-year lows...

@_rob_anderson: Small-caps are trading at their lowest level vs. the S&P 500 (total return) in almost 23 years! $IWM is just 2% above its record relative strength low.

Small caps now make up less than 4% of the total U.S. stock market...

@dailychartbook: Small-caps now represent less than 4% of the total US equity market. via Jefferies

As for small-cap valuations, they currently trade at 60% of the valuation of the large-cap index...

Mid-caps are not much better at two-thirds the valuation of the S&P 500. Pretty easy to see how the big companies could just go on a feeding frenzy and buy all the small companies they want to add growth using their premium stock price currency value.


When small-caps have traded at 12.3x forward earnings in the past 38 years, they often annualized at a near double digit rate over the following 10 years...

Do not forget that the small-cap company investing environment is a most frequent one for the private equity industry. This

BofA Global

Here come the 2024 market forecasts...

Goldman Sachs kicked off the 2024 market forecast prediction season last week. Falling inflation, economic growth and low chances of a recession has led them to project double digit global equity gains and good returns from risk-free bonds as well as credit instruments.

Goldman Sachs

If you like these forecasts, then you are going to love this next set of numbers...

Using the Goldman Sachs projections, I went into our Cobalt database and grabbed the returns of Private Equity over years with similarly strong equity and fixed-income returns. As you would expect, a healthy global equity and credit environment provided a good backdrop for private equity returns. Reasons being: access to credit for private companies, healthy M&A environment as acquirers have good currency value in their equity and the ability to borrow, an open IPO environment allowing private companies to go public, higher peer public company values, etc.

For those that invest in or benchmark against large public companies, just make sure that you keep your Boeing news feed up to date this week...

Making the very profitable 737 again for China is a big deal.

Stock in commercial aerospace giant Boeing stock was on the rise early Monday after a media report said that a yearslong freeze on sales in China could soon be lifted.

The Chinese government is considering a commitment to buy 737 Max jetliners as President Joe Biden meets Xi Jinping in San Francisco this week, Bloomberg reported, citing unidentified people familiar with the plans. The commercial aerospace giant hasn’t made any significant sales of the 737 in China since 2018, before the model was grounded after two crashes in March 2019...

A return to normal in China is good for Boeing shares. So are more plane orders from other airlines. Boeing announced Monday that Turkish-German airline SunExpress will buy up to 90 of the 737 MAX Jets. Long-haul carrier Emirates also announced an order of 90 777X jets early Monday.

“Emirates is the biggest operator of Boeing 777 aircraft, and today’s order cements that position,” Emirates CEO and Crown Prince of Dubai Sheikh Ahmed bin Saeed Al Maktoum said.


Also, interesting to read where ExxonMobil is going to use its fossil fuels exploration technology to drill for lithium in Arkansas. Interesting...

ExxonMobil plans to begin producing lithium in 2027 in a major strategic pivot, as the biggest western oil producer bets it can use its expertise in drilling and processing to become a leading player in the battery metal.

The company said on Monday it had begun work to extract lithium from underground brines in the southern US state of Arkansas, where it has acquired the rights to 120,000 acres of land in the Smackover formation.

“We think we’re going to build a profitable and high-growth business for the long term here. So it’s a big deal,” said Dan Amman, head of Exxon’s low-carbon solutions business, adding that the project built on the company’s “existing knowhow”.

“We’re drilling wells 10,000 feet underground into these saltwater reservoirs. That’s obviously directly in our wheelhouse and capability skillset,” Amman said in an interview with the Financial Times.

The move comes as the energy transition drives a surge in demand for the battery metal. The International Energy Agency has predicted consumption could increase by a factor of more than 40 between 2020 and 2040, on the back of rapid growth in the use of lithium-ion batteries needed for electric vehicles and energy storage.

Financial Times

Interesting to see green technology demand driving the need for trees...

VIDALIA, Ga.—Electric cars. The solar build-out. Washington’s rural-broadband initiative. Utilities bracing the grid for stronger storms. They all depend on the same thing: big trees.

The utility-pole business is booming, thanks to a flood of public and private infrastructure spending. So the hunt is on for the tallest, straightest, knot-free conifers, which are peeled, dried and pressure-treated at facilities such as Koppers Holdings’ pole plant in southeastern Georgia’s pinelands.

Employees cruise surrounding pine plantations, marking pole-worthy loblolly and longleaf and making offers. The bigger, the better these days, given how much more equipment and cable poles must hold in the era of fiber optics and electric cars, said Jim Healey, Koppers’ vice president of utility and industrial products.

For landowners, especially the families and individuals who grow much of the South’s pine, the pole boom means higher prices for standout trees than what sawmills pay.

Shareholders of the two firms that dominate the American pole business—as well as railroad ties—have also been winners. Over the past year, Pittsburgh’s Koppers and Montreal’s Stella-Jones are up 49% and 87%, respectively, compared with a 16% rise in the S&P 500 stock index.

“Demand right now in North America for utility poles is outpacing capacity,” said Stella-Jones Chief Executive Éric Vachon


In the event that you haven't finished your holiday shopping yet...

This is a great list to find that perfect gift for someone who is difficult to shop for. And of course, you can circle some things and leave them in obvious places for others to find.

Every year for over two decades, TIME editors have highlighted the most impactful new products and ideas in TIME’s Best Inventions issue. To compile this year's list, we solicited nominations from TIME’s editors and correspondents around the world, and through an online application process, paying special attention to growing fields—such as AI, green energy, and sustainability. We then evaluated each contender on a number of key factors, including originality, efficacy, ambition, and impact.

The result is a list of 200 groundbreaking inventions (and 50 special mention inventions)—including the world’s most powerful supercomputer, a game-changing entertainment venue, and a new shape—that are changing how we live, work, play, and think about what’s possible.


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The author has current equity ownership in: Home Depot Inc.

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