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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The markets soared last week. Do we have Santa to thank for this year end gift?
Monday
The S&P 500 surged to open the week. Initial indications regarding Omicron have shown less to be concerned about than originally thought. This is indicated by the resurgence of ‘reopening’ trade positions leading the way on Monday. The S&P 500 added 1.17%.
Tuesday
Markets pushed substantially higher on the day as fears around Omicron continue to fade. Technology stocks led the way as the NASDAQ out did the S&P 500. All major indices moved within reach of their all-time highs. The S&P 500 added 2.07% on the day.
Wednesday
Markets opened in the red for Wednesday as JOLT’s job openings topped 11M. A higher reading indicates availability of employment. This further justifies Federal Reserve Board (FRB) action to tighten monetary policy, which caused markets to retreat. They did claw their way out, however, as investor sentiment seems to improve every December… The S&P 500 ended the day 0.31% higher.
Thursday
The Job data keeps rolling in! Initial jobless claims came in at an incredibly low 188K. Under healthy economic conditions a normal reading would be in the low 200K range. So, these reading as of late are a strong indication of a healthy job market. Again, this is currently a net negative for stock market performance and markets slipped for the day. Good jobs data mean sooner FRB action to tighten monetary policy. The S&P 500 shed 0.71%.
Friday
Markets rose to close out the week. Much of the week was a hurry up and wait for Friday. Consumer Price index (CPI) (inflation gauge) came out Friday showing a 6.8% increase year over year. Headlines all read “The highest level since 1982!” To be clear 6.9% was expected. Also, CPI at its height in 1982 was 8.9% and for that cycle 14.8% (January, 1980). So, the positive response from markets was that the inflation increase was less than anticipated. Also, it likely means a more predictable FRB process ahead.
Conclusion
The S&P 500 added 3.82% for the week. It could be attributed to several things: strong job data, Omicron fears subsiding, or the Santa Claus Rally (yes that’s a thing). More likely it is a combination of inflation and Job data making the FRB approach increasingly predictable. It does mean less monetary accommodation, but it also means a predictable path, which investor can adjust for. This week will be important for that path as the FRB is meeting and announcing any potential changes in trajectory.
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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.