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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Is Santa’s rally coming, or will Omicron steal the show? Most importantly, what does it all mean for 2022?
Monday
The week opened in free fall as the Nasdaq led the way lower. Omicron news and the Build Back Better plan getting nixed seemed to sour investors to open the week. Haven stocks did not gain interest in leu of an equity sell off. This came as a result of the anticipated Federal Reserve Board (FRB) rate increases in 2022.
Tuesday
Markets spiked up on Tuesday. It was strongly seen as investors deciding to ‘buy the dip’. There has been a 3% pullback over the last few sessions. The S&P 500 gained 1.78% on the day.
Wednesday
‘Buy the dip’ continued on Wednesday. One clear distinction from a normal ‘buy the dip’ is that volumes are definitely holiday lite. That means that very little can be made of the current rally. The S&P 500 ended up gaining 1.01%.
Thursday
In a holiday shortened trading week, markets climbed to close the week. A word of caution would be that trading volume has been extremely light! It has been running 25% of that of a normal trading day. Not surprising, but cause for caution that this buy spree may not be well founded.
Friday
Merry Christmas! Don’t shoot your eye out!
Conclusion
The week started with an echo of last week’s trading weakness. It very quickly shifted to perhaps the beginning of a Santa Claus rally. Historically, this occurs the week between Christmas and New Year’s. Again, on light trading volume. This could lead to a strong year end but could be of concern for a pullback in January. Also, given past circumstances, the US will likely be in the thick of the Omicron variant come January.
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