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 charged back late in the week. This led to weekly gains, but does the market have staying power?
Monday
Memorial Day
Tuesday
The holiday lengthened weekend did not result in volatile markets Tuesday. The S&P 500 was virtually unchanged for the day. ISM Manufacturing improved more than expected, likely keeping markets calm as they wait for jobs data.
Wednesday
Wednesday’s market movement was muted, much like Tuesday. The S&P 500 gained 0.14% on the day. Market participants seemed as though they are waiting for the results of the monthly jobs report due out Friday.
Thursday
Markets were more active on Thursday as data began to flow. Jobless claims fell below 400K for the first time since the start of the pandemic and services data jumped dramatically. While this was good news, the S&P 500 shed 16 points on what this could mean for the jobs report.
Friday
The May jobs report dropped on Friday morning, showing unemployment has fallen to 5.8%. More importantly only 492K private nonfarm payrolls were added in May. This was a ‘bad news is good news’ situation as the S&P 500 added 36 points on the day. The softer data eases concern over potential inflation.
Conclusion
The S&P 500 is with in 3 points of its all-time high set at the start of May. With earnings season behind us and economic data for May mostly out, it may be tough for the index to set record highs in the coming weeks as headline risk will carry more weight.
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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.