November 2, 2023 – “In investing, what is comfortable is rarely profitable.” — Robert Arnott
With Halloween marking the end of October, Wall Street is now looking ahead to the last two months of the year, hoping to find more treats than tricks. For the trailing quarter, the S&P 500 index has given back -8.25% since July 31st. Looking at the glass as half-full, the S&P 500 is still up nearly +9% for the year.
Unfortunately, October fell right in line with August and September, registering another losing month. In fact, this was the first three-month losing streak since the start of the 2020 pandemic and only the second time in 30 years that August, September and October have all closed negative. So, what went wrong?
The primary downward catalyst last month was the continued rise in Treasury yields that drained demand for riskier assets like stocks. The yield on benchmark 10-year Treasury notes had briefly breached the key 5% level for the first time since 2007, generating fears about the economic impact of “higher for longer” interest rates stance that we have heard from Federal Reserve Chairman Jerome Powell. The other negative factor that stoked fear was the geopolitical fallout from the start of the Israel-Hamas war. Investors are not only concerned with the start of World War III but also, escalating global oil prices.
Long story short, there was a lot to be concerned about in October. However, in my opinion, that doesn’t mean the Bear Market is back BUT it does mean the S&P and other indices in the market need a substantial amount of improvement before being able to declare that any sort of larger rally is underway.
And like so many times before, it will start with yields and interest rates.
The first shoe dropped yesterday when the Federal Reserve announced they would not be raising rates in November (for the second straight meeting) and markets rejoiced as we saw stocks rally and Treasury yields fall. If yields continue to tumble, the market can find its footing and regain some of the losses of the past quarter.
However, the Israel-Hamas War poses serious risk to markets, depending on whether American troops get involved. Unfortunately, there is no way of predicting this outcome, only time.
Lastly, the one other event that we will be keeping our eye on is the looming Government shutdown on November 17th. A new speaker was selected after wasting three weeks that could have been spent passing funding bills and sending legislative proposals to the Senate. Let’s hope that they can move faster, avoid a shutdown and further volatility.
As always, we will continue to keep you in the loop and notify you if any changes are needed.