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 shed weight on inflation data last week, recovering ground late. What caused this swing?
Monday
Monday’s activity was very much still a reaction to the jobs report released the prior Friday. For most of the day markets floated near the highs only to shed value late. Focus shifted to potential supply constraints as a result of the colonial pipeline (CP) ransomware situation. With that shift in focus, the S&P 500 ended the day down 1%.
Tuesday
The S&P 500 shed another .87% on Tuesday. Job openings increased to 8.1M and the CP pipeline remained out of commission. That closure dominated momentum on the markets. Energy prices soared, but equities as a whole struggled.
Wednesday
Inflation data out Wednesday morning roiled the markets! Markets have been pricing in higher inflation as the re-opening trade has been under way for several months now. The repricing continued Wednesday. Core Consumer Prices (Inflation proxy) jumped from 1.6% in March to 3.0% in April. The strong reading raised concerns that we are about to undergo a wave of high inflation. The S&P 500 fell 2.14%, however the NASDAQ led the losses as 2.65%.
Thursday
Initial jobless claims fell to a pandemic low of 473K. This upbeat reading seemed to allow calmer heads to prevail on Thursday as markets staged a rebound.
Friday
In a move that was clearly ‘bad news is good news,’ weak retail sales allowed markets to close higher. The weaker reading encouraged investors that perhaps April’s inflation reading will not be the norm going forward.
Conclusion
There is much focus on inflation right now. Understandably so, supply lines are choked off, employees are hard to come by, and people are starting to get out and spend money. From the semiconductor shortages, a depleted rental fleet from a sell off during the pandemic, to lumber bottleneck. Every where you turn there is evidence of price hikes. All that said, the inflation concerns do not appear to be long term. As workers come back, supply constraints will improve, and these price increases will likely prove temporary. A sign of prices adapting to current circumstances rather than long term inflation increases.
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