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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Docile week as markets reflected marginal losses? No, not at all… What really happened throughout the week?
Monday
Markets dug a large hole to start the week but worked its way out by market close. The bleeding ended up being minor, with the S&P 500 losing 0.1%. The move came as major bank analysts continue to report a hawkish Federal Reserve Bank (FRB) for 2022. They are not only likely raising rates but attempting to reduce their balance sheet during the 4th quarter.
Tuesday
The S&P 500 rose 0.9% and the Nasdaq rose 1.4%. This came after an early drop in markets. The initial risk-off environment was fostered by testimony from FRB chair Powell in the morning. That testimony ultimately confirmed thoughts for investors that the trajectory for rates in coming months will be on the rise.
Wednesday
Consumer Price index (CPI) data out on Tuesday showed a 0.6% increase for the month of December. That monthly reading led to a 7.0% YoY reading. The S&P 500 rose 0.28%. While the YoY number rose, the monthly increase was down from the last two months.
Thursday
The day started in the green and faded hard into the red. The S&P 500 ended up losing 1.42% on the day. FRB officials spoke publicly on Thursday about the Banks intent to start raising rates as early as March. The FRB will do this often in an effort to telegraph their actions. By doing so, they prevent a much broader sell off at the time of the increase.
Friday
Markets floated just under water for the majority of the day. Retail sales missed expectations by a wide margin. Additionally, preliminary readings for consumer sentiment show the metric falling into the 60’s. Outside of the pandemic, we haven’t seen sentiment in the 60’s since 2011. Coincidently, that was the last time we saw inflation above 2%. The S&P ended up pulling into the green for the day ending at a 0.08% rise.
Conclusion
The S&P 500 did lose 0.3% for the week. This comes across as a fairly mild week when taken in total, however intra-week volatility absolutely told another story. The increase in recent volatility is not surprising given the interest rate forecasts for 2022; however, I should remind people that the docile nature of 2021 is not the norm.
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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.