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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There was a little run up on markets from a point total standpoint, but volatility was way up. What does it mean?
Monday
Happy 4th of July!
Tuesday
Markets dove on Tuesday to open the week. The S&P was down nearly 1% by mid-day but came back to end the day down 0.2%. The Delta variant took center stage as concerns are mounting that it could derail the re-opening trade currently in place.
Wednesday
The S&P 500 reached fresh all-time highs. The improved investor sentiment was on the release of Federal Reserve Board (FRB) minutes. They reflected a dovish FRB heading into the second half of 2021. The interesting thing was that interest rates in the treasury market were down. So, while there was a bid in the equity markets, there was not a sell off in bonds. This makes the rally more conservative.
Thursday
Broadly all major indices were down on Thursday. This came as the Delta variant surpassed the Alpha variant as the dominant COVID strain in the US. Continued stress over the variants will likely keep markets from climbing unfettered.
Friday
Markets surged back on Friday and ended in the green for the day (and the week). Yields increased mildly as gold and oil both surged, which are both bullish and bearish at the same time. The increase on a Friday again is a good sign that little negativity is expected across the weekend news cycle.
Conclusion
The S&P 500 rose a meager 17 points for the week. The point line, however, is deceptive as it was a volatile week. The CBOE VIX (Volatility measure) increased from 14.5 to 17.5 as the daily swings were in excess of those in the prior week. The coming week will have economic data in the form of retail sales and industrial production. The variant progress will continue to be watched as well. Additionally, GDP for China will be reported giving further indication to US consumption via Chinese exports. Increased volatility is not surprising as we move into summer months. The reduced volume is the result of summer vacations. With lower volume comes increased volatility. Increased volatility does not necessarily come with losses, it just means the swings are more violent.
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