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 Federal Reserve is trying to put the economy into ‘neutral’. What does it all mean for growth?
Monday S&P 500 0.81% | NASDAQ 1.90%
Ukraine regained territory in their war over the weekend. This improved sentiment early for markets. Elon Musk announced that he currently holds a 9% share of Twitter, which sent tech stocks higher.
Tuesday S&P 500 1.26% | NASDAQ 2.26%
ISM Services data came out strong at 58.3, but that did not deter a selloff in markets Tuesday. Federal Reserve Board (FRB) Governor Brainard made indication that ‘Quantitative Tightening’ could begin as early as May. This is earlier than markets are anticipating. This sent Bond and stock markets south. The ten-year treasury added .14% in yield on the day. If there was a silver lining, it would be that the 2/10 yield curve reverted back to a positive slope.
Wednesday S&P 500 0.97% | NASDAQ 2.22%
Markets opened lower and stayed there throughout the day. The anticipated FRB minutes from March were expected to show a hawkish FRB, sure enough they did. It is now expected that we will see a 0.50% hike in May. Additionally, FRB roll off of their balance sheet will likely begin.
Thursday S&P 500 0.43% | NASDAQ 0.06%
Market movements on Thursday were focused on a more aggressive FRB, given the minutes from Wednesday. Markets were up, but to be noted was that the leading stock sectors were defensive, i.e. staples and healthcare. Initial jobless claims fell to 166K for last week, which signals continued strength in the job market. This signal reinforces FRB action.
Friday S&P 500 0.27% | NASDAQ 1.34%
Growth stocks led lower on Friday as concerns swell regarding a potential recession as a result of an over-active FRB. We have time before a recession, but markets pricing growth stocks will not be fortunate in the run up.
Conclusion S&P 500 1.27% | NASDAQ 3.86%
Markets moved lower for the week as yield curve inversions and an aggressive FRB could bring us closer to recession. ‘Neutral’, where the FRB is neither tightening nor loosening monetary policy is perceived to be between 2% and 2.5%. We are currently sitting at 0.25%. If the FRB were to aggressively raise rates over the remainder of the year, then we could get to ‘neutral’. This means that we likely have 8 to 12 months before tighter monetary policy could lead to a recessionary environment.
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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.