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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Another down week led by the NASDAQ. Are there signs of hope in the long term forecast though?
Monday S&P 500 0.57% | NASDAQ 1.63%
Equity markets were in no mood to be boring on Monday. The markets opened choppy, oscillating between green and red. At one point, the 10-year treasury got above 3%, sending equity markets decidedly lower. At another point, the S&P 500 was 1.67% lower on the day. Late in the day, with one hour of trading left, markets rallied back to end in the green.
Tuesday S&P 500 0.48% | NASDAQ 0.22%
The growth story stayed relatively contained on Tuesday as the Federal Reserve Board (FRB) press conference is on Wednesday. Every time the markets tried to break out, they clawed back down. The 10-year treasury rate floated lower early and closed nearly unchanged.
Wednesday S&P 500 2.99% | NASDAQ 3.19%
The FRB delivered what the markets were expecting. They lifted the Fed Funds Rate by 0.50% and committed to rolling off their balance sheet starting June 1st. The commitment will eventually get to $95B, however that won’t be until September. The S&P 500 traded sideways until the data from the FRB was available, after which markets soared into the close. The 10-year treasury was little changed, indicating that the FRB hike was baked in already.
Thursday S&P 500 3.56% | NASDAQ 4.99%
The entire week of positivity was reversed in one broad selloff. The S&P 500 is currently off 13.54% and the Tech heavy NASDAQ is currently off 22.20%. The broad market move says that while the FRB was less fierce than expected, they are being aggressive with policy. That aspect does not change the expected decrease in revenue for US companies.
Friday S&P 500 0.62% | NASDAQ 1.45%
Happy Jobs Day! Jobs data held strong as the unemployment rate remained at 3.6% and the US added over 400K jobs in April. The participation rate is holding at 62.2%. Additionally, wage growth increased 5.5% annually. This rate keeps pace with Core PCE (a key indication of inflation). This could reflect a stickier inflation environment. Markets reacted negatively to the good news. It signals more room for the FRB to raise rates without having to worry about the job market.
Conclusion S&P 500 0.21% | NASDAQ 1.54%
The FRB is working to provide enough restriction to quell inflation, but not enough to cause a recession. The last time that effectively occurred was in 1994. The FRB aggressively rose rates to keep inflation at bay. If the FRB could successfully achieve a ’soft landing’, the follow-on story to the early ‘90’s was great. That five-year period of growth in the late ‘90’s has been unrivaled. It is still to be seen if the FRB can achieve that soft landing. If they do, they may set the table for a growth heavy period for the next few years.
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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.