Giving Back Minor Gains
Quick Take: Stocks erased early gains in October to finish lower on the month amid tech weakness.[1] Bond yields surged (prices went lower) following strong economic data. [2]
Stocks lost ground in October, with the S&P 500 declining 1% to snap a five-month winning streak in equities.[3]
October was shaping up to be another positive month as equity markets logged fresh record highs. [4] Third quarter earnings results helped investors take stock of whether valuations are justified, and it kicked off with generally positive earnings in financials.[5]
Source: https://www.bloomberg.com/news/articles/2024-10-30/stock-market-today-dow-s-p-live-updates
However, tech shares sold off on the final day of the month after disappointing quarterly results spooked markets.[6] It was the first day in 29 consecutive sessions where the S&P had lost more than 1% — this streak of limited losses had been the longest run in three years.[7]
Run-Up in Bond Yields
Source: https://www.wsj.com/finance/investing/deficit-threat-drives-bond-yields-higher-6a043d44?mod=series_stockmarket
Treasury bonds suffered their biggest monthly loss in two years, as traders pared bets on aggressive interest rate cuts, with the economy continuing to show signs of strength.[8] Monthly changes in yields were significant as the 10-year Treasury yield gained just under 0.5% in October to 4.28%, while the 2-year rose just over 0.5% for its highest monthly gain since February 2023.[9] Prices move lower as yields go up.
Bond yields rose partly on concerns over the prospect of a rising federal budget deficit that is anticipated to get worse after the election, regardless of which party takes the presidency.[10] Since Republicans control the White House and Congress, they may extend existing tax cuts set to expire after 2025.[11],[12] This could add to growing deficits. Treasury yields broadly increased in October as betting markets indicated a greater chance of a Trump victory.[13] (Which now, at the publishing of this recap, we know to be true as the election has passed.)
Source: https://www.bloomberg.com/news/articles/2024-10-30/us-hiring-in-adp-data-rises-to-fastest-pace-in-more-than-a-year
The strength of employment numbers also supported higher bond yields. Weekly jobless claims data showed strength in the economy, as new applications for unemployment benefits hit a five-month low.[14] Surprisingly solid demand for workers appeared in the ADP private payrolls report, which rose to the fastest pace in over a year, blowing out forecasts despite major hurricanes hitting the Southeast.[15] Overall strong employment data suggests that we’re headed in the right direction, without major deterioration in the labor market.[16]
Rates and Financial Conditions
As discussed in recent months, the Fed is now placing significant emphasis on defending the job market.[17] Inflation data has been encouraging and the focus is on easing into a soft landing for the economy. With the economy humming along, larger rate cuts might not be necessary.
The robust jobs report effectively closed the door on another half percent cut in rates in November, with a quarter point move seen as most likely.[18]
It might seem like there is still plenty of scope for rate cuts. Even after the 50 bps point rate cut in September, the Fed’s inflation adjusted policy rate is near the highest since 2007. [19]
The equity market’s 40% rise over the past 12 months and US corporate credit spreads at the tightest for 20-years, however, suggest a different story.[20] Financial conditions have actually eased substantially over the past year, which could boost GDP by as much as 0.7% over the next 12 months.[21] In some cases the tail might be wagging the dog, with equity market gains lifting asset prices and making financing easier, creating a self-fulfilling loop.[22]
US Economy Outperforms Global Peers
A key driver for market outperformance has been the underlying U.S. economy. As inflation slows, the US economy is defying forecasts and outperforming its global peers.[23] The first estimate of US GDP for the third quarter showed solid growth with consumer spending rising the most in 18 months.[24] GDP growth numbers Q3 were boosted by strong consumption and a surge in business spending on equipment, up 11.1% and the fastest since Q2 last year.[25]
According to The Economist, America’s general economic output has strikingly outperformed for years, with real growth at 10% since the start of 2020, which is three times the average for the rest of the G7 countries.[26] Among G20 countries, inclusive of large emerging markets, America is the only country whose output and employment are above pre-pandemic expectations.[27]
Source: https://www.economist.com/special-report/2024/10/14/why-the-american-stockmarket-reigns-supreme
This seems to have translated into strong market returns. In the 20th century, US equities produced a real return of 7% per year, vs 4.9% in the rest of the world. With the power of compound interest, American stock investors have ended the century over seven times richer than investors elsewhere.[28] As a result, the value of the American stock market is about 61% of global market capitalization, closing in on highs reached in the 1960s.[29] American exceptionalism is still alive and well.
Looking Ahead
Source: https://www.reuters.com/markets/us/sp-500-futures-soar-record-high-after-trump-claims-victory-2024-11-06/
Markets prefer certainty, and a decisive end to the presidential election offers the chance to move ahead with a little more clarity. The Fed meeting the first week of November brought a 25bps cut in rates as the market anticipated.[30] In the short-term reaction to these events, investors have been supportive of higher equity market valuations.[31]
This year has brought more challenges and opportunities, and we are grateful to be part of your financial journey. If you haven’t already, please connect with us to schedule your year-end review and as always, let us know if your financial situation has changed.
As the holiday season approaches, we give thanks, count our blessings, and look ahead to the future. All domestic markets and the JSF office will be closed this Thursday, November 28th in honor of the Thanksgiving holiday. Please note that on Friday, November 29th, all domestic equity markets will close at 1PM ET and the bond market will close at 2PM ET. Wishing you a season of warmth and joy with friends and family!
Your Friends at JSF
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The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.
The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
TLT-iShares 20 Plus Year Treasury Bond ETF seeks to track the investment results of an index composed of US Treasury bonds with remaining maturities greater than twenty years.
The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities.
Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.
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[1] https://finance.yahoo.com/news/asian-equities-fall-us-bond-223754132.html
[2] https://www.wsj.com/finance/investing/deficit-threat-drives-bond-yields-higher-6a043d44
[3] https://www.wsj.com/livecoverage/stock-market-today-apple-intel-earnings-dow-sp500-nasdaq-live-10-31-2024/card/thursday-slump-threatens-s-p-500-s-monthly-winning-streak-77bkdvqhndk4xlzolUla
[4] https://www.reuters.com/markets/us/futures-mixed-ahead-week-packed-with-earnings-economic-data-2024-10-14/
[5] https://www.reuters.com/markets/us/futures-fall-investors-brace-earnings-season-tesla-dips-2024-10-11/
[6] https://www.wsj.com/finance/stocks/big-tech-earnings-drag-down-stocks-29ce830b
[7] https://www.wsj.com/finance/stocks/big-tech-earnings-drag-down-stocks-29ce830b
[8] https://finance.yahoo.com/news/asian-equities-fall-us-bond-223754132.html
[9] https://www.wsj.com/finance/jgbs-mixed-ahead-of-boj-decision-56e3f95c
[10] https://www.wsj.com/finance/investing/deficit-threat-drives-bond-yields-higher-6a043d44
[11] https://www.wsj.com/finance/investing/deficit-threat-drives-bond-yields-higher-6a043d44?mod=series_stockmarket
[12] https://www.wsj.com/politics/policy/republicans-4-trillion-question-should-they-pay-for-extending-trump-tax-cuts-ebbe67f3
[13] https://www.wsj.com/finance/investing/deficit-threat-drives-bond-yields-higher-6a043d44?mod=series_stockmarket
[14] https://www.reuters.com/markets/us/us-weekly-jobless-claims-fall-hurricane-distortions-fade-2024-10-31/
[15] https://www.bloomberg.com/news/articles/2024-10-30/us-hiring-in-adp-data-rises-to-fastest-pace-in-more-than-a-year
[16] https://www.wsj.com/economy/jobs/jobs-report-september-unemployment-economy-dfa7c99f
[17] https://www.reuters.com/markets/us/with-fed-pivot-hand-powell-may-opt-broad-brush-approach-jackson-hole-2024-08-23/”>https://www.reuters.com/markets/us/with-fed-pivot-hand-powell-may-opt-broad-brush-approach-jackson-hole-2024-08-23/
[18] https://www.wsj.com/economy/jobs/jobs-report-september-unemployment-economy-dfa7c99f
[19] https://www.reuters.com/markets/rates-bonds/financial-conditions-vs-real-rates-is-fed-policy-too-tight-or-too-loose-mcgeever-2024-10-31/
[20] https://www.reuters.com/markets/rates-bonds/financial-conditions-vs-real-rates-is-fed-policy-too-tight-or-too-loose-mcgeever-2024-10-31/
[21] https://www.reuters.com/markets/rates-bonds/financial-conditions-vs-real-rates-is-fed-policy-too-tight-or-too-loose-mcgeever-2024-10-31/
[22] https://www.reuters.com/markets/rates-bonds/financial-conditions-vs-real-rates-is-fed-policy-too-tight-or-too-loose-mcgeever-2024-10-31/
[23] https://www.reuters.com/markets/us/us-economy-posts-solid-growth-election-eve-2024-10-30/
[24] https://www.reuters.com/markets/us/us-economy-posts-solid-growth-election-eve-2024-10-30/
[25] https://www.reuters.com/markets/us/us-economy-posts-solid-growth-election-eve-2024-10-30/
[26] https://www.economist.com/special-report/2024/10/14/the-american-economy-has-left-other-rich-countries-in-the-dust
[27] https://www.economist.com/special-report/2024/10/14/the-american-economy-has-left-other-rich-countries-in-the-dust
[28] https://www.economist.com/special-report/2024/10/14/why-the-american-stockmarket-reigns-supreme
[29] https://www.economist.com/special-report/2024/10/14/why-the-american-stockmarket-reigns-supreme
[30] https://www.reuters.com/markets/us/view-fed-cuts-rates-25-bp-expected-2024-11-07/
[31] https://www.reuters.com/markets/us/sp-500-futures-soar-record-high-after-trump-claims-victory-2024-11-06/