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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Bear territory was reached Friday, signaling a sustained rangebound period. Does it mean something else this time?
Monday S&P 500 0.40% | NASDAQ 1.21%
Markets swung between losses and gains throughout the day. Towards the end of the day, it became decidedly negative, closing out in the red. There was very little economic data to swing the markets one way or the other.
Tuesday S&P 500 2.02% | NASDAQ 2.76%
The jump in markets came on the back of strong retail sales. There was a fear that retail sales would weaken on strong inflation data; however, the consumer remained strong. Capacity utilization also came out yesterday at 79%. The signal tells investors of tighter economic conditions, which lend themselves to inflation when the rate is in the 80’s.
Wednesday S&P 500 4.04% | NASDAQ 4.73%
Equities continued their march lower on Wednesday. The S&P 500 broke through the psychological floor of 4000 points, but that level carries little factual weight. Housing data showed future weakness for new home sales. Additionally, oil inventories fell unexpectedly. Oil markets were up early on the news; however, they faded as the equity sell off gained steam. The main catalyst to the selloff was reports from Walmart, Target, Home Depot, and Lowe’s that detailed consumer buying behaviors. The big box stores indicated that consumer activity has shifted to more conservative buying. To the contrary, the home improvement stores have indicated no such change that consumption is showing strength.
Thursday S&P 500 0.58% | NASDAQ 0.26%
Quite often, following a market sell off, we will see a bounce the following day. Not on Thursday… Equities oscillated between gains and losses throughout the day, ultimately landing slightly lower. The S&P 500 is off approximately 19% from its high. It is inching ever closer to bear market territory (20% fall from recent highs).
Friday S&P 500 0.01% | NASDAQ 0.29%
Markets opened in the green in reaction to lending rates in China being eased. That faded quickly and the S&P 500 pushed down about 1.4%. This brought the index to 20% down from it’s high. Late in the day, markets rallied to end unchanged.
Conclusion S&P 500 3.05% | NASDAQ 3.82%
The S&P 500 fell 20% from their January highs. The significance of this is that a fall of 20% marks a bear market. During recessions, this is a market where rallies will occur (markets hang lower rather than putting in new highs). Bear markets in expansions frequently are short-term swings of losses rather than sustained down periods. At the end of 2018, we hit bear market territory and markets proceeded to rally capturing new highs throughout 2019. This may be a recent point, but it does give us hope that the storm may be almost over.
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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.