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 and volatility were little changed week over week. The inside story, however, was far more interesting!
Monday
What. A. Monday… Markets ended the day higher. The reason for excitement is that at one point, the S&P 500 was down as much as 3%. It ended the day up 0.63%! The 3% fall moved the S&P 500 into correction territory and immediately caught a bid. Its ability to persist will remain to be seen as we get the Federal Reserve Bank (FRB) meeting results later this week.
Tuesday
It was almost déjà vu on Tuesday. Markets slumped early and attempted a comeback. That comeback stalled late in the afternoon with the S&P 500 losing more than 0.5% on the day. Much of the moves were continued speculation over the FRB meeting that will end on Wednesday.
Wednesday
The FRB did not disappoint. They have been very transparent about their intent to raise rates soon, soon is likely March. Additionally, they have stated that they will begin reducing their balance sheet via attrition after rate hikes. There are approximately $300B in under 90 maturities that could begin rolling off their balance sheet as early as this spring. It is still to be determined to what extent they will allow this to occur. Markets LOVED the news and showed the love by losing 0.15% on the S&P 500 for the day. This came after the index was up as much as 2% at times.
Thursday
The S&P 500 slipped 0.54% Thursday in a move that was contrary to data. GDP walloped expectations, growing by 6.9% when 5.5% was expected. Even 5.5% would have been lofty, however 6.9% was well above estimates. The concern is that the continued hot growth (consumption) will continue to lead to higher prices (inflation).
Friday
Markets bounced to end the week as the S&P 500 gained 2.45% on the day and 0.77% for the week. The sentiment from Friday was a clear indication from investors that many of the week’s concerns were likely overblown.
Conclusion
Volatility was way up at mid-week as markets were trying to decide how deep they wanted to take this correction. Late in the week, Bulls took over and buying ensued. Often there is a second wave of selling after the storm appears to have cleared. So, we may not be out of the woods just yet. Look for more clarity after the Friday jobs report this week.
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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.