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 rose on hopes of an infrastructure compromise. What does it mean for markets and inflation as we look ahead?
Monday
The new week brought optimism. So much so that the markets rebounded more than half the losses from the prior week in one day. All eyes are to Washington, however as Federal Reserve Board (FRB) Chair Powell is set to testify.
Tuesday
FRB Chair Powell’s testimony about inflation rising higher than expected did not sully the mood of markets. The S&P 500 still rose 0.51% on the day. While he acknowledged it rose more than they expected, they won’t be making any rash decisions about increasing rates early.
Wednesday
Markets were fairly unchanged for the day. The S&P 500 fell 7.44 points (0.18%). The new home market continued to cool as purchases fell by 5.9% (May). While construction costs have increased approximately 10% over the last year, new home prices have risen 17%.
Thursday
The market activity was bullish on Thursday with all major indices higher. This move was a forward-looking move as durable goods orders and new unemployment claims missed estimates. An infrastructure deal was agreed upon in principle which brought optimism on spending.
Friday
Consumer sentiment missed estimates. It was expected to rise to 86.4 and came in at 85.5 (June). The softer sentiment could lead to weaker than expected retail spending. It’s becoming more likely that second quarter GDP estimates will miss expectations.
Conclusion
Markets surged back this last week. Not on economic data, as that was weak, but rather the hope brought about from an infrastructure package. If delivered, it should alleviate some of the jobless rate issues plaguing the new expansion. However, it will likely exacerbate some supply line constraints. This will calm some overall inflation concerns while leaving material prices elevated for some time.
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