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Markets in October 2023 Thumbnail

Markets in October 2023

Investment Insights

  • Stocks declined for the third month in a row with the S&P 500 down 2.1% as interest rates continued to rise. Small cap stocks and international equities were down even further with the Russell 2000 falling 6.8%, the EAFE down 4%, and Emerging Markets off by 3.9%. 
  • Over the past three months the S&P 500 is down 8.3%, while the Russell 2000 is down a whopping 16.7%. Hitting its lowest level in three years and down over 30% from its 2021 high. 
  • Most US equity indices are flat to negative for the year except for the S&P 500, which is still up 10.69%. However, like we have spoken about before, all of the gains reside in the top 7 stocks. Without those 7 stocks, the S&P would be down 2.05% YTD.  
  • This selloff has primarily driven by concern over the Fed’s higher for longer narrative pushing yields to highs not seen since 2007. The Barclays US Aggregate bond index is down 2.77% and down for the third year in a row. The concern is that although we haven’t seen too much of an impact yet, higher rates will inevitably make their way through the economy and undermine fundamentals. 
  • So far, the economy has remained extremely resilient led by a fully employed consumer. Q3 GDP topped estimates and increased 4.9% led by a 4% gain in consumer spending, a 7% increase in government spending and an increase in inventories. 
  • It’s hard for earnings to not increase with that type of economic production. After three straight quarters of earnings declines and with roughly ¾ of S&P 500 companies reporting thus far, earnings are on track to grow 3.7%. 82% of companies are beating estimates above the 10-year average beat rate of 74%. Forward guidance on earnings has been mixed. So, analysts are now expecting growth of 3.9% in Q4 vs 8.1% estimated as of September 30th. 
  • The Fed left rates as is for the second straight meeting. Markets interpreted Powell’s commentary as more balanced than originally feared might be the case after the huge Q3 GDP growth. This allowed rates to begin to come down. 
  • Economic data continues to come in mixed, see more below. 

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 paused hiking rates the past two meetings.  
  • Earnings are rebounding so far in Q3 and analysts forecast additional growth in Q4. 
  • There is a lot of cash is 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. 
  • Most developed foreign central banks are tightening policy at the same time, which may further amplify a global contraction.  
  • Some research reports indicate that excess savings accumulated during the pandemic may have already been depleted or will be in the near future. Student loan payments also just began again in October. 
  • Credit card debt is reaching 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. 
  • 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

  • 150k jobs were added in October vs 170k expected. The unemployment rate rose to 3.9%. This comes after 336k jobs were added in September, far exceeding expectations for 159k.

  • The JOLTs report showed job opening rose to 9.61 million in August, well above consensus of 8.8 million.

  • PCE inflation for September came in line with consensus at 3.7% and core at 3.4%.

  • Core CPI came in at 0.3% in September and 4.1% over the past year, in line with expectations.

  • PPI in the US rose 0.5% in September from August, above expectations of 0.3%.

  • The Univ. of Michigan Consumer Sentiment Index fell to 63 in October from 68.1 in September. The lowest in five months and missing consensus of 67.2.

  • ISM Manufacturing PMI dropped to 46.7 in October, breaking a streak of three consecutive increases.

  • ISM Services PMI fell to 51.8 in October, the lowest in five months and below forecasts of 53.

  • Retail sales increased 0.7% in September vs 0.3% expected. 

What We Are Doing 

The economy continues to defy high interest and high nominal GDP supports corporate earnings. However, sticky inflation may cause the Fed to keep rates higher for longer inevitably impacting the economy.

As rates moved higher and stocks sold off, the S&P 500 reached a 10% decline from its July high. In select portfolios most underweight we used that opportunity to add to equities slightly. However overall, we still remain a slightly more conservative tilt until we find further evidence that the economy won’t deteriorate faster than inflation falls.

 We are underweight equities, underweight small caps, and overweight defensive sectors. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.