Market moves across the month were to the south. Fixed income markets seemed to have a more drastic message on the monitor than that of equities.
Fixed Income: 2-Yr Treas Yield 4.16% | 10-Yr Treas. Yield 4.28%
Bond markets went for a reversal ride in October. After several months of falling rates, we began to see a pullback in the bond market as interest rates rose. The 2-year treasury rose 0.55%, while the 10-year treasury rose 0.54%. The good news is that while rising, the rates did not invert again. The long picture remains intact. We are still in an elevated rate environment with them more likely to drift south rather than north. This move may have been the result of predictions for a potential structure that would mean tariffs. This would reflect a higher inflation potential which would signal a slower path in future rate cuts. Additional good news is that while rates from 6 months on rose, shorter duration rates continued to fall. This bodes well for the normalization of the entire curve.
Equities: Dow Jones 1.34% | S&P 500 0.99% | NASDAQ 0.52%
While it was a down month for equites, the overall move south was not bad for the month. From the top of the market for the S&P 500 (10/18/2024) to the end of the month logged a 2.83%. This proved to be a mild lead up to the beginning of November. The nice part is that while a correction has not materialized, earnings season did, bringing the P/E ratio for the S&P 500 back down to 21.19.
Throughout the month utility stock did well until the last week of the month. A shifting towards Financial and consumer discretionary was underway. Neither of which are surprising given interest rates (favoring financials) and the fact that we are in the fourth quarter… I like to say, ‘Americans spend money they do not have on things they do not need’, AKA: holiday season!
Conclusion
Equities pulled back less than was indicative of the rate move on the bond market. The move there signaled more concern about higher rates for longer than equities chose to price in. The shift in rates seemed like a long-term change in projection, while short rates seemed anchored to FRB actions. The longer rage rates often can be equated to long range GDP expectations. If the view is that we would have stronger forward GDP in 5 years, then we see a stronger 5-year rate.
A Look Ahead…
Market responses in October could have been far more drastic than they were. We should feel fortunate that we got the October that we did. This still leaves a correction (a market fall of 10% to 19%) unattended to. The last one ended 10/27/2023. While stretched P/E’s from over the summer have become more reasonable, that’s been due to strong earnings. Those may continue in the short run, but moving into 2025 those might be harder to come by. It may very well cause a correction in the first half of the year.
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The route of the NASDAQ picked up steam last week. What does this mean for broad markets?
Monday
Markets rebounded strongly on Monday, led by the Nasdaq that was so sorely bruised last week. The Nasdaq rose 3.01% while the S&P 500 added 2.38% on the decidedly bullish day. Leading the way were financials, technology, and industrials.
Tuesday
The day started in the red. The sell trend continued to pick up steam additional losses persisted. This happened as interest rates continued their march higher.
Wednesday
The reflation/inflation trade gathered steam on Wednesday as markets sold off strong. The S&P 500 lost 1.32% and the NASDAQ fell 2.7%. The tech sell-off strengthens as yields rise. The rise could also pose a concern for the feverish housing market as mortgage rates rise.
Thursday
The day started very mundane and in the green. That faded quickly after Federal Reserve Board (FRB) Chair Powell spoke. He said they will not raise rates any time soon, however, no potential solutions for current rate issues were given. Markets dove and interest rates rose on the lack of guidance from the FRB. Investors at this time seem to be betting against the FRB’s statements which is a dangerous stance to take. The assumption is that inflation will be meaningful enough that the FRB will react sooner than they want.
Friday
Markets started the day in the green only to fade quickly to be down as much as 1.2% for the S&P 500. Mid-morning however everything (and I mean everything) came surging back. The mid-morning low put the NASDAQ squarely in correction territory (a pull back of 10% or more). It had fallen nearly 12% from its high in February. The NASDAQ ended up more that 1.5% while the S&P 500 led the way, up almost 2%.
Conclusion
The S&P 500 rose 0.81% on the week. This was its first positive week in the last three. Recent market weakness should be indicative of a correction rather than a prolonged downturn for several reasons. Manufacturing and services are both in expansionary territory. Jobs are growing at a pace quicker than expected. Vaccinations are moving ahead of schedule. The FRB is remaining very accommodative. Additional stimulus is coming sooner than later. All the turmoil has been in fear that growth is going to be TOO strong, TOO fast, causing inflation. The fear being that it will cause corporations to miss elevated growth expectations on a higher debt burden. That said, the route of the NASDAQ is occurring on positive economic expectations, which should help lead the markets higher.
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Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.