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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Stocks slid for another week. Was there anything we should learn from the moves this last week?
Monday S&P 500 1.03% | NASDAQ 0.60%
Markets opened the week as they left off the prior week. This has been a common trend as of late. The one difference being that markets closed below their June 16th low of 3,666.77, at 3,655.04. The S&P 500 is now down 23.80% YTD. The only meaningful economic news on the day was an under sold 2-year treasury auction. Being undersold provided heavy upward pressure on 2-year and 10-year rates.
Tuesday S&P 500 0.21% | NASDAQ 0.25%
The pressure was too much for markets on Tuesday. They opened in the green, with the S&P 500 up as much as 1.6%. All of that faded, though, as continued downward pressure on sterling caused upward pressure on the dollar. Sterling has been fading since the new government in the UK announced a tax cut package. This comes at a time when central banks around the world are tightening policy. It created a scenario where rates are expected to jump 1.25% and the currency is falling. These are typically highly correlated, which is in direct opposition to what is happening now. Tax cuts are viewed as inflationary and the wrong direction for a developed economy given the inflation issue at hand.
Wednesday S&P 500 1.97% | NASDAQ 2.05%
Rates swung violently to the south. When rates fall bond prices rise. Apparently, stocks rise as well as the easing rate environment created growth in equity markets. The Bank of England started a two-week bond buying program Wednesday. This was done in an effort to stem the bleeding as rates were running away to the north. Not much is expected to be different two weeks from now. This unexpected program sent rates lower drastically in the UK and also here in the US.
Thursday S&P 500 2.11% | NASDAQ 2.84%
The Thursday trade retraced all the gains made on Wednesday. GDP was re-affirmed for Q2 at -0.6%, providing two consecutive quarters of negative GDP. Classically a recession, but not this time. The logic is that consumer spending rose by .5% but that inventories dragged overall GDP into negative territory.
Friday S&P 500 1.51% | NASDAQ 1.51%
Quarter number three of 2022 is in the books, and it was not one to remember. The final reading of CORE PCE data (inflation reading) rose to 4.9% from 4.7%. This caused concern that we may be dealing with an aggressive FRB for some time. PCE is the FRB’s preferred measure of inflation.
Conclusion S&P 500 2.91% | NASDAQ 2.69%
Friday was a rough day to cap a rough week, month, quarter, and year. There are reasons for hope in the fourth quarter, but also reasons for doubt. Corporate earnings could buoy the markets in October/November; however, expectations have been diminished as an economic slowdown has been widely expected. The election could cause turbulence or be applauded for grid lock. And of course, the Santa Claus rally could brighten markets as consumer spending increases earnings, or it could drive market fears of more rate hikes from the FRB due to higher inflationary pressures.
One thing is for sure: large single day increases on the equity markets are not our friends. If markets jump up 2%, they can tumble just as fast (as was seen on Wednesday and Thursday).
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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.