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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It was a pummeling this last week on the markets. Interest rates fell and markets did as well, will it continue?
Monday
Novavax announced efficacy data that shows over a 90% rate. Had this been released in November it would have contributed to a market rally. In a ‘good news is bad news’ environment; markets were down most of Monday. They climbed in the last few minutes of trading to end the day in the green.
Tuesday
Inflation indicators signaled more on the horizon. Additionally, retail sales came in weak. In a shift in mentality, this data although bad news, actually caused a negative day on the markets.
Wednesday
Markets fell on Wednesday as the Federal Reserve Bank (FRB) showed indication that rates may raise sooner than previously announced. It wasn’t a dramatic shift as they are still likely on hold until 2023. This created tension in markets as higher rates spell lower profits for corporations.
Thursday
The S&P 500 was steady after a volatile Wednesday. This was surprising as initial jobless claims rose for the first time since the beginning of April. This sign does not bode well for re-opening. Markets however are enjoying that data. So much of re-opening has been priced in that slower opening data has actually been welcomed.
Friday
Markets tumbled on Friday heading into the weekend. This seemed to be a continuation of the negative tone all week. Mainly spurred on by the more hawkish tone of he FRB.
Conclusion
The S&P 500 lost 1.91% across the week. The adjustment that the FRB made to their forecast, while large, was expected. Likely the concern is that no one expected it as of yet. The next major checkpoint to watch for the FRB would be their annual meeting in Jackson hole (August).
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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.