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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Earnings were strong across the week, which pushed markets higher. Will it hold up for future quarters?
Monday
The S&P 500 rose .50% to open the week. This was a great opening figure. As of late, markets have opened the week with a blah performance. It has either been down or only up slightly. VIX is currently 16 and this would represent the upper ended of the daily range for the S&P 500.
Tuesday
The S&P 500 rose 0.20% on Tuesday. The housing market provided some explosive data as new home sales surged by 14%. Additionally, the Home Price Index, which measures change in average home prices rose 18.5% YoY (Oct). Believe it or not, this measure is a slow down from last month’s 19.2%.
Wednesday
Markets shifted lower for the first time in a while on Wednesday. The S&P 500 lost 0.50%. Corporate earnings contributed to the move lower for the first time. Earnings from large cap Tech stocks, out Tuesday evening, pushed market sentiment lower at the open. Compounding the sentiment was a larger than expected draw down of oil supplies. This lends to concerns around continued price pressures, AKA inflation concerns.
Thursday
The markets rebounded nicely on Thursday, as the S&P 500 rose 0.98%. Initial jobless claims fell to the lowest level since the start of the pandemic (281K). A trend that is happening more and more as of late. For perspective, average initial job losses at the end of the last expansion were around 200K to 220K per week.
Friday
Markets closed the day and the week on an up tone. The S&P 500 rose 0.20% to end the day and a weekly gain of 1.14%. This happened even as consumer sentiment came in at 71.7. The brighter news of the day was higher than expected consumer spending. Additionally, Personal Consumption Expenditures (PCE) came in at 4.4% YoY in September. While the highest level to date, it is still substantially lower than its CPI counterpart at 5.4%. The Federal Reserve Board (FRB) regards the PCE measure as a more accurate indication of inflation.
Conclusion
Markets celebrated another strong week for corporate earnings, even as GDP slides to 2.0% in Q3 from 6.7% in Q2. 55% of S&P 500 companies have now reported and 82% are beating on earnings and 66% have beat on revenue. Cost cutting initiatives should be expected over the next year as companies attempt to absorb higher input costs. Unfortunately, expect coming quarters earnings beats to fall as interest rates creep higher and inflation deteriorates bottom line performance.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long-term holding strategy is the best strategy in any market environment.
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.