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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Markets fell hard for the week. Omicron rose as a threat, but was that really the big news of the week?
Monday
Markets opened the week mildly lower. The S&P 500 fell 0.32% on the day. Federal Reserve Board Chair Powell was renominated for his seat. The lack of a reaction from equity markets is a result of the known behavior he represents. Bond markets actually reacted adversely as he represents a dovish stance. This means there are concerns that he may wait too long to take necessary actions.
Tuesday
The S&P gained back some of the losses from Monday as it advanced 0.16%. Manufacturing data rolled in better than expected; however, services data (the crux of our economy) softened.
Wednesday
On Thanksgiving eve, markets managed to rise as the S&P 500 closed above 4,700. The S&P 500 gained 0.22%. The major news was that initial jobless claims fell to 199K. This marks the first time that this statistic has fallen below pre-pandemic levels!
Thursday
Happy Turkey Day!
Friday
Omicron gripped markets around the world on Friday. As there is little certainty surrounding the new variant, the unknown drove trading. Recovery stocks suffered, while stay at home stocks caught a bid. With the Thanksgiving holiday causing light trade, volatility was exacerbated, and the S&P 500 shed 2.27%!
Conclusion
Most will see the actions of Friday as the big news, however, the renomination of Powell may prove more impactful. Little is known about Omicron to understand its full implications. The renomination of Powell provides certainty that we will likely continue on the path of tapering. That path maybe accelerated as result of persistent inflation. This also means a continued path towards rate hikes in early 2023. Those hikes may also be accelerated to fall 2022 as a result of persistent inflation. These changes represent adjustments to outlooks, rather than wholesale changes to investment strategies.
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