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 rose last week, and optimism was a bound early in the week. Was it misguided?
Monday S&P 500 2.59% | NASDAQ 2.27%
Markets opened the week in stark contrast to how they ended last week (and month). The sad part was that the move higher for equities came on signals that the US economy weakened. It was a move that signaled an expectation of a less hawkish Federal Reserve Bank (FRB). As of late, rallies of this type have been very short lived.
Tuesday S&P 500 3.06% | NASDAQ 3.34%
The rally continued for a second day. The strength of these increases is concerning as a reversal day would likely be just as deep. The moves to the north are happening under a false hope of a pivot from the FRB. This came as the Royal Bank of Australia delivered a smaller increase than expected. Additionally, after the UK removed a tax cut for the wealthy, interest rates began to retreat. This reaction was merely a reversal on the rate increases after the policy was announced a week ago. The FRB very plainly told markets on 8/26 not to expect a pivot until inflation has been beaten. With inflation siting above 8%, it seems unlikely to consider that beaten. This rally will likely be short lived.
Wednesday S&P 500 0.20% | NASDAQ 0.25%
The shine on the two-day rally came off a little on Wednesday. 10-year yields bounced back up and equities opened deep in the red. The good news is that throughout the day, equities managed to claw all the way back to even.
Thursday S&P 500 1.02% | NASDAQ 0.68%
Equities turned lower on Thursday as FRB governors are echoing the hawkish stance of the Bank. Additionally, initial jobless claims rose, however, it was a slight increase. 219K job losses is a pace that signals a strong job market. The number will likely increase to 300K or higher in a recession.
Friday S&P 500 2.80% | NASDAQ 3.80%
Happy Jobs Friday! Markets tumbled to close out the week. The jobs data was strong as the unemployment rate crept down to 3.5% on 263,000 non-farm payroll additions. The FRB is looking for the rate to increase and for job adds to slow closer to break even. Inflation will likely continue to be an issue awhile unemployment remains below 4% to 4.5%.
Conclusion S&P 500 3.01% | NASDAQ 0.73%
Equity markets rose for the week. Something that has been rare as of late. The rise, however, is seeming short lived as it was mainly from the first two trading days of the week. The rest of the days represented a claw back of those gains. The reason for gains was that if we get a recession, the FRB will pivot strategy to stabilize the economy. There has been zero indication from a very transparent FRB that this would be the case. There is historical precedent to say the market is right, however, all of those precedents came during low inflationary periods. At this point, rather than looking for a pivot, markets should accept a stabilization of rates is most likely. This would be the case until we see substantial damage to the employment market. At which time, the FRB would likely pivot as enough damage would have been done to inflation.
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