For the third straight month, major U.S. equity indices suffered losses. The Dow, S&P 500 and NASDAQ were down 1.14%, 2.2% and 2.8% respectively in October. The volatility reflected the conflict in the Middle East, mixed economic data, corporate earnings reports and higher for longer interest rate expectations. The S&P 500 breached the -10% correction guideline during the month. Our “Third Quarter Disappointment: What’s Next” piece foresaw this downturn.
Corporate earnings reports were generally positive, but corporate guidance for the next few quarters was generally cautionary, if not negative. Third quarter GDP growth rate was up a remarkable 4.9% lending support to “higher for longer” expectations. Counterbalancing the positive news was increasing inflation growth (3.7%), rising unemployment (3.9%) and a slowdown in new hiring.
Investors continued to favor bonds over risk assets, driving bond yields higher and bond values lower. The 10-year Treasury hit a 16-year high during October and ended the month at 4.88%. This benchmark is the basis for mortgage rates, and corporate and consumer debt. The 30-year Treasury also nudged 5%. The market is setting these longer-term rates. Higher borrowing costs will slow down economic growth more than Fed actions. The Fed can only control short-term rates, the rates at which banks borrow from each other. In short, the market is doing the Fed’s work for it.
So far, November has given us something to be thankful for: A significant rally. Some observers see it as a technical rally driven by computer trading as certain indicators suggest an unrealistically oversold market. Others think the rally is driven by investors feeling more optimistic about owning risk assets as they believe the Fed will now be less inclined to impose a rate hike in December or in early 2024.
In either case, the major U.S. market indices are all up for the first 9 days of the month: the DOW (3.05%), the S&P 500 (3.7%) and the NASDAQ (5.22%).
With market conditions not being very hospitable of late, we will enjoy this recent uptick with the recognition that many economic, monetary and geo-political variables remain fluid. As always, our long-term approach is designed to see through short-term market fluctuations, but with the holidays upon us, we are thankful for the signs of resilience.