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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Headlines included Omicron, Jobs, Manufacturing, and Services PMI. So, what led the charge lower and why?
Monday
The S&P 500 jumped to open the week, rising 1.32%. This was a bounce day after a strong move lower the previous Friday. The bounce is not surprising as the move lower was based on information not formerly available (Omicron). Light market trade on Friday from the holiday on Thursday exasperated the situation.
Tuesday
Selling pressures resumed on Tuesday as all the gains from Monday were reversed and then some. The S&P 500 fell 1.90% on the day. Federal Reserve Board (FRB) Chair Powell indicated that inflation was proving more resilient than anticipated while testifying on Capitol Hill. This gave markets moment for pause. This is an indication that we will likely see rate hikes (monetary tightening) quicker than anticipated.
Wednesday
Wednesday started strong as investors responded favorably to ISM Manufacturing data. That momentum quickly faded, however, as the first case of Omicron was detected in the US. The S&P 500 gave back another 1.18%.
Thursday
Another bounce came on Thursday as the markets faded Omicron concerns. Initial jobless claims continued their run at lower levels as only 222K initial claims were filed. The S&P 500 rose 1.42%.
Friday
Happy Jobs Friday! It was a mixed report. Private nonfarm employment was a hard miss, coming in at 235K when 530K were expected. The rate of unemployment fell, however to 4.2%, even as participation rose to 61.8%. Largely overlooked was the fact that ISM Services PMI rose to 69.1 for November. Services make up over 80% of our economic activity, this data carries strong meaning. For perspective, this is the highest reading dating back to the start of tracking in 1997. The pandemic low (April) was 41.8!
Conclusion
Interestingly, the jobs data released on Friday seemed bleak as a result of seasonal adjustments. In all actuality, 778K jobs were added, but, that is adjusted down in comparison to last year’s figures. Aside from a miss on wage growth (which actually signals less inflationary pressure), the jobs report was quite favorable:
- 778K jobs added
- 4.2% unemployment rate, a decrease
- 61.8% participation, an increase
- 7.8% Underemployment rate, a decrease
- 4.8% YoY Earnings increase, equal
So why the fall on markets? The FRB has a dual mandate, inflation of approximately 2% and full employment. Full employment has historically been deemed to occur at around 4%, however inflation is running hot at 5% (PCE). Investors see the job market as stable enough that the FRB will be turning their attention to inflation. This happens by the FRB taking away accommodative policies such as bond buying programs. It then moves to them tightening monetary policy by raising interest rates and selling bonds on their balance sheets. All of which signals contained economic growth expectations in the near term.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
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.