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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July gained more than we have seen since 2020. Is it sustainable or should the bears be feared?
Monday S&P 500 0.13% | NASDAQ 0.43%
It was a rocky start to the week. Earnings did not really get under way for the week until after market close. Tuesday carried a much thicker representation of earnings data. Early trade was quite likely focused on affairs in Ukraine that continue to make global foods supplies questionable. This impacts inflationary pressures.
Tuesday S&P 500 1.17% | NASDAQ 1.88%
Inventory was the story of the day Tuesday. Walmart reported a need to slash prices even further to induce buying. This is in an effort to alleviate an inventory buildup. This news and what it could mean for other retailers sent stocks lower. This might just be an opening salvo on how inflation gets defeated…
Wednesday S&P 500 2.62% | NASDAQ 4.06%
Markets opened in the green in anticipation of the FRB press conference later in the day. That meeting did not disappoint. The FRB raised interest rates 0.75% to 2.50%, the top end of neutral. Markets applauded the move, but more so the language surrounding the move. They sounded more dovish towards future rate hike activity given economy weakness.
Thursday S&P 500 1.21% | NASDAQ 1.08%
Welp… 2nd quarter GDP came in at -0.9%. This was the second consecutive quarter of negative GDP. With no additional context this signals a technical recession. The necessary additional context is that consumers, which makes up 70% of GDP, was positive 1% on the quarter. The drag on GDP was that much of the bottlenecks since last year have cleared and created heavy corporate inventories. Those inventories act as a negative on economic growth. Ultimately, markets rose on the decreased likelihood of an aggressive FRB.
Friday S&P 500 1.45% | NASDAQ 1.88%
Inflation, inflation, inflation… Personal Consumption Expenditures (PCE), the FRB’s preferred measure of inflation firmed in June. Headline PCE rose to 6.8%, while core PCE rose to 4.8% (removing fuel and food). On a positive note, earnings data out Friday was strong with only 2 major companies missing expectations.
Conclusion S&P 500 4.26% | NASDAQ 4.70%
Breaking with recent trends, last week gained for the second week in a row. The month of July proved to be a strong month for equities. The S&P 500 rose 9.11% and the NASDAQ was up by 12.35% in the month of July. Given that we are in a bear market, last week’s strength should be short lived. Some air will likely be taken out of those gains.
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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.