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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Monday
Rotation, rotation, rotation. Markets fell Monday led by the NASDAQ. The gainers for the day were financials, commodities, and specifically energy. The move is indicative of rising inflationary expectations.
Tuesday
The start of trading on Tuesday looked much like Monday as markets opened deep in the red. Technology shares led the market lower once again. The move, however, did not last. The S&P 500 erased all of its losses for the day to end the day up 0.13%. The NASDAQ was not as lucky as it still fell 0.5%. This further advanced the value vs. growth trade.
Wednesday
Markets on Wednesday shrugged off the recent woes and steamed to a strong close. The S&P 500 rising 1.14% out pacing the NASDAQ at 0.99%. Much of this came following Federal Reserve Chair comments affirming loose monetary policy well into the next economic expansion.
Thursday
The day started bad and just kept getting worse. The S&P 500 tumbled 2.45% and the NASDAQ tumbled 3.52%. This was happening as interest rates continued to rise in anticipation of inflation later this year. This inflationary expectation is nothing new. The economy is improving quicker than expected and appears to be spooking the markets.
Friday
The S&P moved between positive and negative territory all day. Settling 0.48% lower. This was not much of a rebound statement after the tumble markets took Thursday. The reflation trade that calls for strong growth later this year is concerning in the credit markets. The burden that debt will have on corporate balance sheets as rates rise could cause concerning pressure on earnings.
Conclusion
Last week was a rough one for the markets. The S&P 500 lost 2.45% and the NASDAQ fell 4.92%. The losses last week reflect concerns that the economy will grow too fast. As consumption ramps up, inflation becomes more of a risk. That inflation will likely lead to a steeper yield curve causing adjustable-rate debt to increase interest obligations on corporate balance sheets. This increased debt obligation is feared to cut into corporate profits in the future. In this way too much growth can be a bad thing… Kind of…
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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.