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 wild ride last week. As it came to a close, markets were pointing north, but will this endure?
Monday
Markets opened the week sharply lower on Monday, with all major equity indices losing around 2% on the day. This brings the S&P 500 fall from peak, now 4.5%. This came as concerns worsened that a default by China’s Evergrande was likely on Thursday.
Tuesday
The S&P 500 came out of the gates hot as buyers attempted to ‘buy the dip’. This did not last though as markets faded into the close and the S&P 500 managed to end breakeven. Typically, it is a good sign to see investors buy back half the losses from the prior day. As it shows a purchasing appetite. That lack of appetite may be a waning after a summer of feasting.
Wednesday
Markets rose beyond VIX expectations on Wednesday. This came as Evergrande came to a deal that would help them avoid defaulting on Thursday. Additionally, the Federal Reserve bank (FRB) completed their two-day meeting. Dot plots show increased risk of rate increases in 2023. The FRB also announced that they will begin tapering later this year. In prior meetings they stated they will be discussing it, so this is a dramatic shift.
Thursday
The rise continued through Thursday as investors appeared to applaud the FRB’s effort to tighten monetary policy… Not a sentence I ever expected to write. What it does, however, is set expectations and create predictability.
Friday
The Markets ended the week mixed. The S&P 500 rose, however capping a very active week for the market. In what was a busy week for housing, we learned that new home sales rose 1.5% for August on Friday.
Conclusion
This last week started with a gash to the bottom line as markets opened the week sharply lower. Clawing its way back into the green, the S&P 500 actually rose by 22 points (or 0.5%) for the week. Regardless of how the numbers ended for the week, volatility is notably higher the last few weeks. We started the month at 16 and have ranged between 18 and 26 in September. The month is not over and more may be on tap as focus on the debt ceiling heats up.
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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.