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 S&P 500 shed 1.94% on the week as Omicron took center stage. Will Omicron steal Santa’s Thunder?
Monday
Markets opened the week in the red. This came as the first true negative news broke on Omicron over the weekend. There are now studies showing that second dose treatments of MRNA vaccines are not very effective on Omicron. Additionally, the UK announced their first fatality of an Omicron infected individual.
Tuesday
Inflation, inflation, inflation… Omicron, omicron, omicron… Markets dove on Tuesday as the Producer Price Index rose more than expected. The fear being that companies will have to pass those price increases through to consumers or realize weaker profits. Either scenario is bad. Omicron continues to make noise as its high transmission rate is leading to spikes in cases.
Wednesday
Market movement early was very minimal. Most investors seemed to be awaiting the results of the FRB meeting. The FRB did not disappoint. They will accelerate their taper program from $15B/month to $30B. They also signaled the potential for as many as 3 hikes in 2022. This data should prompt a negative market response, however, the markets climbed in response. The S&P 500 ended up adding 1.63% on the day. So why the gain? Investors likely view the increased action from the FRB as being in line with market expectations given current conditions. By accelerating their process, they avoid a potential misstep of being too dovish and letting inflation run away from them.
Thursday
Re-opening stocks did well on the day, but the markets as a whole fell back from the surge on Wednesday. The Nasdaq lagged the S&P 500, which is logical since it has been leading on the up days as well. The S&P 500 ended up losing 0.88% on the day. The Nasdaq dropped 2.47%. The moves on the market seem to be the long response to the FRB move yesterday. The actions of the FRB would lead towards leaner demand and softer profits on the year.
Friday
Markets tumbled on Friday while there was no major economic data on the day. The void left by economic data pushed the focus to headlines surrounding Omicron. The S&P 500 ended up falling 1.07% to close out Friday. The week saw the S&P 500 tumble 1.94%!
Conclusion
One of the fears of an overly aggressive FRB is taking action before the job market can fully mature. Participation is an important factor to the term “full” employment. In 2007, participation in the labor market was running at 66% of the population. After the 2007 recession, the rate continuously fell until 2013. The workforce contraction had much to do with the boomer generation retiring. From 2013 to 2020, the participation rate held steady at 63%. This was a combination of boomers holding off retirement and an influx of the millennial generation into the work force. During the pandemic, the rate fell to 60.8% and has since bounced back to 61.8%. So, the big question is, “Where is that other 1.2%?” If we start attacking inflation before they comeback, will we stem job growth and prevent full employment? No. They are not coming back. With every recession, you’ll find workers who decide that retirement chose them rather than the other way around. As a result, there is very little fear that the FRB’s actions are moving too quick, but rather too slow.
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