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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Markets moved lower last week, again. Is volatility telling us anything about what to expect for the next month?
Monday
We experienced a very modest day of movement on Monday. A welcomed change from the headline risk that has been accompanied with every weekend as of late. The S&P 500 lost 10 points or 0.24%.
Tuesday
Volatility picked back up on Tuesday. The implications from sanctions on Russia posed a difficult pill for markets to swallow. Early, the S&P 500 fell more than the NASDAQ as markets were pricing in a less hawkish Federal Reserve Board (FRB). The S&P 500 ended up falling 1.63%, while the NASDAQ lost 1.69%.
Wednesday
A full reversal was in order Wednesday. The S&P 500 recovered all the losses from Tuesday as it rose 1.80%. NASDAQ lagged, as has been the standard as of late, rising 1.62%. The FRB chair, Jerome Powell, testified before congress on Wednesday. During which he made it clear that a 0.25% rate hike is more likely for an opening move, not 0.50%. This was cheered by markets as a less hawkish stance than expected in recent weeks. At the same time, he also stated that consecutive hikes should be seen as normal. It felt as though the FRB chair was trying to send a message to expect that later this year.
Thursday
Markets rose on Thursday. The S&P 500 rose 1.33% on the day while the NASDAQ lagged, rising 0.04%. This is a signal that strong jobs data is expected for tomorrow. Strong data would increase the hawkishness of the FRB. This is because it would make it easier for the FRB to hike interest rates.
Friday
Happy Jobs Friday! Jobs data did not disappoint as the unemployment rate fell to 3.8% and 678K nonfarm jobs were added. The participation rate reached a pandemic high of 62.3. This is a signal that more workers are optimistic about their job prospects. The strong jobs showing is a signal that the FRB will be more concerned with inflation in their coming meeting. This makes a rate hike all but a certainty for March. With all that good news, we were rewarded with a down market. The tension in Ukraine after a standoff at a nuclear power plant was a bit much for markets to handle. Additionally, the fears of a rate hike’s impact on earnings took a toll on stock prices. The S&P 500 ended up falling 0.79% on the day. The NASDAQ sold off 1.66%.
Conclusion
The week was not great for markets as the S&P 500 lost 1.27% and the NASDAQ lost 2.78%. VIX started the year at 16.60 and has climbed as high as 33.32, which was this past Tuesday. Market volatility over the next month is now expected to be around 1.6% daily. That volatility could be reflected in gains or losses but given geo-political risks at play the latter is likely.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
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.