Markets In October
Markets in October
- October ended in the red across most indices and asset classes due to an end of month sell-off, which saw interest rates rise and equities fall. The S&P 500 fell 0.9%, while international markets fared much worse with the EAFE and EM down -5.44%, -4.45% respectively.
- Only three of eleven sectors were positive with Financials, Communication Services and Energy up 2.69%, 1.94%, and 0.79% respectively. While Health Care, Consumer Staples and Real Estate lost 4.6%, 3.5%, and 3.3%.
- Interest rates pushed higher with stronger than expected economic data as well as possible future inflationary and deficit concerns under different administration actions, reducing the number of expected rate cuts. The 10-year rose 49 basis points to 4.28%, while the 2-year rose 53 bps to 4.18%. This caused the U.S. Aggregate Bond Index to lose 2.48%.
- The Mag 7 that have reported thus far have beaten estimates and once again are likely going to be responsible for about 70% of Q3 earnings. However, despite a beat the markets are punishing MSFT and META for increasing their AI spending even further.
- With 70% of the S&P reporting, Q3 earnings are currently on track for 5.1% earnings growth, which would be the fifth straight quarter of growth. 75% are beating earnings estimates but by a smaller margin than usual.
- Q3 GDP grew 2.8%, with consumer spending still strong advancing 3.7%.
- Gold rose another 4%, up 31% YTD.
- Bitcoin rose 10%, topping $70k for the first time since June and up 71% YTD.
Why It Could Keep Going Higher
- The primary driver of U.S. economic growth is the U.S consumer and most Americans are fully employed and enjoyed significant wage gains over the past couple years. Most with low debt service costs.
- Inflation continues to decelerate, albeit slowly and the Fed has initiated its monetary easing with a larger than expected 50 bps cut.
- Earnings are expected to grow between 8% - 12% in 2024 with continued growth in 2025.
- Fiscal policy is still providing a tailwind to economic growth.
- Artificial Intelligence capex and promises of productivity gains are still in the early stages.
- There is a lot of cash still on the sidelines and investors may put it to work on the fear of missing out.
Biggest Risk
- Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
- Valuations are stretched and if earnings do not live up to expectations, a sell-off could occur.
- Some research reports indicate that excess savings accumulated during the pandemic may have already been depleted and consumer spending is showing signs of cooling.
- Credit card debt has reached an all-time high. Delinquency rates are rising on auto loans and credit card balances, and we’re starting to see an increase in bond defaults, albeit all from below average levels.
- If the economy does begin to slow down, high wage costs may force employers to lay off workers to maintain profit margins.
- Additional bank failures and commercial real estate defaults.
- Further Geopolitical tensions.
Economic Data
- Q3 GDP grew 2.8%, with consumer spending still strong advancing 3.7%.
- Only 12k jobs were added in October, the lowest monthly figure since Dec 2020. However, there were likely some distortions due to the Boeing and dockworker strikes, as well as recent hurricanes. The unemployment rate remained unchanged at 4.1%.
- PCE inflation data showed improvement but still higher than expectations up 2.1%, with Core PCE up 2.7%.
- CPI came in slightly higher than expected at 2.4% and Core CPI of 3.3%.
- PPI came in slightly higher than expected at 1.8% and 2.8% for Core.
- Retail sales grew more than expected up 0.4% over the month.
- JOLTS report showed job openings fell much more than expected to 7.44M. The quit rate fell to 1.9%.
- US ISM Manufacturing PMI slipped to 46.50.
- US ISM Services PMI rose to 54.9.
What We Are Doing
With the Fed now initiating an easing of monetary policy we believe this will help the economy maintain its expansion even if at a slower pace. We are still optimistic that the most important metric for stock market performance, which are corporate earnings, will continue to grow into the next quarter.
However, with valuations high we maintain a neutral equity allocation and will likely pair some gains during additional rallies. If we see any more patches of volatility into the elections we would likely use that as a buying opportunity. The election outcome does create some nuanced investment scenarios that may unfold over time and will likely change our sector allocation weighting.
We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.