Bad Months Come In Threes

Pumpkin
 

Stocks and bonds mutually declined for a third consecutive month, continuing on the zigzag, downward path that they each have been travelling since mid-July. After five months of spring and summer gains, both the S&P500 and NASDAQ have now dropped more than 10% from their highs, an ignominious achievement that lands both indices squarely in correction territory. One of the major reasons for the selling was Q3 earnings, which came in more with a whimper than a bang. While earnings reports have generally been “good but not great,” forward guidance was mostly downbeat, inspiring many investors to measure the risk/reward of returns moving forward and take some profit off the table. All told, the S&P500 was down -2.2% during October, and the NASDAQ lost -2%.

The bond market saw similar weakness during the month, as the yield curve steepened dramatically and weighed on sentiment. US 10-year Treasury yields breached 5% during October, as the factors driving yields higher (strong US growth, hawkish Federal Reserve, loose fiscal policy) overwhelmed factors driving yields lower (moderating inflation, tight credit standards). The bond market has had a difficult time digesting the hectic mix of earnings reports and economic data that all seem to support a “higher for longer” scenario with respect to interest rates. For those expecting a return to a very low-rate regime – or even a more normalization of the interest rate environment – disappointment and delay may be in store during the coming months and quarters. Savers and conservative investors on the other hand have cause to rejoice as the ability to lock in respectable returns appears here to stay.

Geopolitical risk reared its ugly head in the month, as an October 7th attack on Israel by Hamas shone a spotlight on a situation which had in recent years been relatively stable. Initially, the impact on global markets was limited as the conflict was viewed as contained. However, in the ensuing days and weeks, the prospects of a broader, regional conflict contributed to feelings of angst and unease, as the risk of escalation rises the longer the conflict persists. While equity and bond markets have tended to historically overlook geopolitical events, it is possible that a wider conflict could make its impact felt across many markets, with oil and inflation immediately coming to mind. This situation bears watching, and we hope for a peaceful resolution as soon as possible.

The tragic events in the Middle East did influence commodity and real asset prices, as some commodities have reversed their intra-year losses, and the broad Bloomberg Index gained 0.3% during the month. The flight to safety trade was readily apparent in gold, long considered to be a safe haven asset, but oil prices also rallied on a potential disruption in supply stemming from the conflict. Nonetheless, oil prices including both the domestic (West Texas Intermediate) and international (Brent) varieties, remain below their September peaks. The ongoing conflicts in the Middle East and Ukraine could push global commodity markets into uncharted waters, but for now, investors and traders seem to be taking the developments in stride.

Looking ahead, we see the remainder of Q3 earnings and a slew of economic data being released in the weeks before Thanksgiving. November has historically been the best-performing month on the calendar dating back to 1970, and investors could use a reprieve with stocks having fallen in three consecutive months. While it is true that bond yields have continued their relentless upward march of late, it is worth nothing that the 10-year yield stalled out at the psychologically important 5% level and has retreated slightly since, which could indicate that yields will need to take a breather in the short term. Theoretically, that should be positive for both stocks and bonds. Either way, the seasonally weak September and October period is now behind us, and we look forward to the holiday season with a sense of hope and gratitude for what has been, despite the unending pessimism and negative sentiment, a decent year for allocators and investors alike. Here’s to a bullish Thanksgiving.