Navigating a Pivotal Financial Week: October lived up to its volatility reputation. Treasury yields have risen and geopolitical concern has weighed on markets. The S&P 500 index, the stock market barometer, is down 3.5% for the month, bringing its losses to almost 10% since late July. So, what’s next in 2023? The bond market may hold the answer.
The US Federal Reserve has maintained a “higher for longer” interest rate policy. These factors and growing economic concerns drove the benchmark 10-year Treasury yield above 5% earlier this month, its highest level since 2007.
Why is this significant? Well, higher Treasury yields present a formidable headwind to stocks, primarily because they compete with equities for the attention of investors. It’s this fear of escalating yields that’s causing investors to ponder if the Fed will reinforce its hawkish message at the monetary policy meeting scheduled for November 1.
The plot thickens as we anticipate the release of robust U.S. employment data next Friday. If the data lends support to the argument for maintaining elevated interest rates as a means of cooling down the economy and staving off inflation, yields could very well continue their ascent. Sam Stovall, Chief Investment Strategist at CFRA Research, succinctly captures the sentiment when he says, “Stocks will start to recover when the market believes that bond yields have peaked.” This statement hints at the intricate dance between the bond and stock markets.
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Looking at futures markets, they seem to be pricing in a near-certainty that the Fed won’t be making any moves in November. There’s also a hefty 80% chance that the central bank will keep rates steady in December. This extended timeline is in line with policymakers’ projections, extending the timeline for rate hikes well into 2024, longer than what the markets had previously envisioned.
Investors are currently engaged in a sort of “waiting game,” where every economic data point plays a critical role in determining if another rate hike should be factored in. As Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth, aptly puts it, we’re closely watching to see how much economic data needs to shift to make another rate hike a viable option.
With a sizzling Gross Domestic Product growth rate of 4.9% in the third quarter, the labor market’s persistent heat and the Fed’s potential need for further tightening to control inflation have the potential to stoke the fires of volatility.
As we stand at this juncture, the question of whether the robust growth witnessed over the summer will extend into the fourth quarter hangs in the balance. Charlie Ripley, Senior Investment Strategist for Allianz Investment Management, states, “It feels like we are at a crossroads whether or not the strong growth we’ve seen over the summer months will continue over the fourth quarter.” This dilemma is compounded by concerns over inflation and a restrictive monetary policy.
Adding to the bond market’s jitters is the anticipation of the Treasury’s announcement regarding upcoming auction sizes. Fears stemming from a burgeoning federal deficit and increased supply have played their part in pushing yields higher.
But it’s not just the bond market that’s keeping us on the edge of our seats. We also have Apple, one of the tech behemoths, poised to release its earnings report. This earnings season has seen its share of disappointments, with some major players in the growth and technology sectors, such as Tesla and Google, falling short of expectations. The tech-heavy Nasdaq 100 index has witnessed an 11% drop from its peak, although it remains up by nearly 30% for the year.
For some, there’s a glimmer of hope that the worst of the selling may be behind us. History suggests that the stock market is likely to rebound in November, making it the third-best performing month, with an average gain of 1.5% since 1945. So, let’s not forget that seasonal trends often come into play.
Furthermore, this year has shown an intriguing trading pattern. In the 14 instances where the S&P 500 has soared by at least 10% through July and then faced a decline in August, as it did this year, it has shown gains in the last four months of the year. The average gain in these instances has been a solid 10%.
From a technical perspective, stocks are showing signs of being “oversold.” If economic data unfolds as expected, a rally could be in the cards. As Randy Frederick, Managing Director of Trading and Derivatives at the Schwab Center for Financial Research, aptly notes, “The stock market is poised for a late Q4 rally.”
So, fasten your seatbelts, dear readers, because this week has all the makings of a financial rollercoaster, and we’ll be watching with bated breath to see how the markets react to these pivotal events.