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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Stagflation was all over the news this week. What could job data mean for future inflation?
Monday
Markets tumbled to open the week. This was driven by inflationary fears as oil prices climb. Additionally, with stimulus wearing off, 2022 should see slower growth than 2021. This ultimately leads to fears of a stagflation environment.
Tuesday
In a rare occurrence, markets bounced the day after a pull back. They regained a large chunk of the losses from the prior day. This was largely a trade on overblown stagflation expectations as services outperformed.
Wednesday
Markets opened lower as promising employment data signals the Federal Reserve Bank (FRB) is more likely to begin tapering. Late in the day a debt ceiling deal was offered by one side of the aisle which buoyed investor sentiment. The deal is short in nature but does provide an additional 1.5 months to come to a longer-term deal. This was enough to lift markets into the close.
Thursday
The S&P 500 rose 0.35% on Thursday, however, it was higher early and faded throughout the day. Initial jobless claims fell more than expected, which contributed to gains. Otherwise, it was likely a continuation of the prior days enthusiasm for a debt ceiling deal.
Friday
Markets found themselves marginally lower on Friday as the monthly jobs report failed to impress. Nonfarm payrolls rose by 194K when 366K was expected. Potentially more concerning is the 61.6% participation rate in comparison to 61.7% last month. That might not sound like much of a change, but that means there were 170,000 less people looking for work.
Conclusion
The October jobs report will be an important measure of the job markets health. This would represent the first full month after elevated unemployment benefits fall off. Look for the first Friday of November to carry significant meaning. A good job report could signal better than expected future spending, but tamer supply side inflation. A weak report could signal continued pressures on supply side inflation and low growth looking ahead.
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