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 retreated further on aggressive Fed intervention. Can they avoid thwarting economic growth and manufacture a “soft landing”?
Monday S&P 500 3.88% | NASDAQ 4.68%
Monday began much as Friday ended. Markets headed south from the open and stayed there throughout the day. This left the S&P 500 closing officially in bear territory. This represents a close down 20% from recent highs (January 3rd). It was viewed as an investor reaction to the Federal Reserve Board (FRB) meeting later this week. Recent higher than expected inflation may make for more aggressive action from the FRB.
Tuesday S&P 500 0.38% | NASDAQ 0.18%
Markets struggled to find direction on Tuesday. This was likely an anticipatory day as the FRB meeting results will be out on Wednesday. In a break from recent trends, the NASDAQ outperformed the S&P 500.
Wednesday S&P 500 1.46% | NASDAQ 2.50%
The NASDAQ led the way higher on markets Wednesday. This came in response to an FRB hike of .75%, leaving the Fed Funds Rate at 1.5%. They made comment in the post meeting press conference that their year-end target is now updated from 3% to 3.5%.
Thursday S&P 500 3.25% | NASDAQ 4.08%
Markets started in the red and accelerated through the close as a pointed response to the biggest rate hike by the Federal Reserve since 1994. Rate hikes of this size are unusual, but Powell has said they will act to subdue inflation which spurred more selling. Mortgage rates continued their rise as rates responded to the Fed’s Hawkish policy.
Friday S&P 500 .22% | NASDAQ 1.43%
Markets started a rebound bid in early trading and fluctuated throughout the day following comments by Jerome Powell of the Federal Reserve. The volatility index rose to 33 from 27.8, proving the queasy feelings across broad markets. 2-year Treasury yields finished the oscillating week at 3.17% because of rate pressures and earnings outlook for growth.
Conclusion S&P 500 5.79% | NASDAQ 4.78%
Markets felt continued pressure as all indexes retreated on the week. The possibility of a “soft landing” is still on the table but it’s too early to tell. This term is used when there is more restrictive policy in place at the Central Bank and ultimately could determine whether the economy slows down too abruptly or softly. Markets have been responding accordingly. A key measure will be if the volatility index eases in coming weeks.
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