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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Jobs data missed expectations in April, but earnings did not disappoint! What drove markets last week?
Monday
Markets opened the week (and month) in the green. The S&P 500 led the way, up 0.25%, while the NASDAQ shed about 0.5%. This deviation is a continuation of the re-opening trade that has been playing out over the last 6 months.
Tuesday
There was a sharp reversal of fortunes on Tuesday as the markets dove in a way we had not seen since March. Former Federal Reserve Board (FRB) Chair, Janet Yellen indicated that monetary policy may tighten sooner than the FRB is saying. She later indicated (after market close) she in no way was trying to postulate on the direction of the FRB.
Wednesday
As a result of former FRB Chair Yellen’s retraction, markets surged at the open. This momentum faded as the day wore on. The S&P 500 ended up gaining 0.07%, while the NASDAQ fell 0.37%. The NASDAQ led the losses on Tuesday, so this further extends the re-opening trade at play.
Thursday
As a prelude to the jobs report, markets celebrated the lowest initial unemployment number since the start of the pandemic. The figure fell to 498K. For perspective, pre-pandemic, the figure was frequently around 200K. The S&P 500 gained 0.8% on the day, with the NASDAQ rising by 0.4%.
Friday
The monthly unemployment report was in focus on Friday. It was an abject disappointment. Unemployment rose to 6.1% from 6.0% and nonfarm payroll employment rose 266K. Expectations were for the unemployment rate to fall to 5.8% and payrolls to add 1M! While new hirers disappointed, the participation rate increased, which left more unemployed workers to be counted. By that measure the increase in the unemployment rate is not as disappointing. It just means that more people are feeling optimistic about job prospects. Even with the disappointment around jobs the S&P 500 managed to add 0.7% on the day.
Conclusion
If there is one thing the jobs report reminded us of this past Friday, it is that recoveries are uneven. The S&P 500 added 1.5% on the week. Earnings season has been robust with growth near 50% YoY and 86% of companies beating expectations. The miss on employment was actually viewed as a net positive. The FRB may not take the punch bowl away too soon as expected. Also, perhaps inflation concerns were overblown. More likely than not, it is an example of how non-linear life can be. We will likely see a lift in new hirers in coming months offsetting April’s ‘disappointment’.
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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.