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 kind of heated up last week but in the wrong way. Should more of the same be expected?
Monday S&P 500 0.40% | NASDAQ 0.48%
Manufacturing data out Monday morning signaled a weaker than expected economy. It is still growing but at a slower pace than expected. This caused markets to come out of the gates hot. That momentum cooled as the day wore on. The major catalyst to this was the 10-year treasury rate climbing above 3%. This benchmark is symbolic of future rate hikes by the Federal Reserve Board (FRB).
Tuesday S&P 500 0.95% | NASDAQ 0.94%
Markets opened in the red but bounced as the 10-year treasury fell below a 3% interest rate. Energy shares benefited from a Goldman Sachs forecast that projected $140 oil this summer (currently appx. $121). Additionally, World bank projections for global growth were revised lower, which implies there will be pressure on FRB hike decisions.
Wednesday S&P 500 1.08% | NASDAQ 0.73%
Equities fell on the day. This came as oil inventories were lower than expect. Lower inventories mean higher prices, in turn, means more inflation–which ultimately, means more rate hikes…NYMEX crude oil was up over 2% on the day.
Thursday S&P 500 2.38% | NASDAQ 2.75%
Markets tumbled on Thursday on news that the ECB would begin rate hikes in the coming month. Oil markets faired better with NYMEX crude only falling 0.57%. Friday brings Consumer Price Index (CPI) data that investors may very well be priming for.
Friday S&P 500 2.91% | NASDAQ 3.52%
CPI data out Friday morning showed inflation had unexpectedly climbed to the highest level in recent history. This led to renewed selling pressure on the markets as it could create a more aggressive FRB. Interestingly, Core CPI which strips out food and fuel, actually went down. Weaker prices in those key areas would be key to renewed consumer confidence.
Conclusion S&P 500 5.66% | NASDAQ 7.05%
The prior two weeks resembled a calming in markets for the first time since March. This last week made sure no one was lulled into a false sense of stability. Volatility rose sharply on Friday, but still remains below long-term peaks. Also, the S&P 500 has fallen within striking distance of closing in a technical bear market. It should be expected that the markets will retest those lows in the near future.
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