Commentary for October, 2024

Hello all - we hope you had a nice October.

Stocks started the month moving modestly higher, but a late-month decline pushed the indexes into negative territory.  The Dow closed down 1.3%, the S&P 500 fell 0.9%, and the Nasdaq, which has a higher concentration of tech stocks, lost 0.5%.

 

Here’s a look at how the markets moved this month:

Here’s a look at how the various sectors of the market performed:

Bonds were a big topic this month.  Bond yields rose sharply, so your bond prices have fallen.

Last month, the Fed announced a rate cut which was intended to lower borrowing costs.  Since the announcement, however, the bond market has done the exact opposite of what the Fed wanted.  Bond yields (rates) have gone higher, not lower.

This means borrowing costs are going higher, which is the exact opposite of what the Fed wanted.

What’s the reason for the sudden rise in yields?  No one’s really sure – and we’ve heard many theories.  

It could be because the U.S. debt level is rising dramatically, so investors want higher yields as protection.  It could also be a need to keep up with higher expected inflation.  Or the debt ceiling fight coming up.  Or the uncertainty around the election.  Or maybe its because the economy is doing well and further rate cuts won’t be needed.  

Either way, the sudden rise in bond yields is concerning.  

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ECONOMIC CONCERNS

Speaking of bond yields, they can be a great predictor of the economy.  And they are telling us a recession is closer than ever.  

First, we’ll look at the yield curve, which is something we’ve talked about often.  We won’t go into specifically what this is, but the chart is what’s important.  

In the chart below, notice how the brown line dips down and pops back above the black horizontal line.  Every time this happens a recession follows (a recession is noted by the gray shaded area).  If history holds true, this chart suggests that a recession is very near.

Here’s a similar chart, but with a different bond maturity.  It shows a recession is a little further away, but still on the horizon. 

Another recession indicator we talk about every month is the leading economic indicators.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index continues to be negative, and it has never gone this long without a recession following.

Finally, another recession indicator is the level of bankruptcies, which continue to rise.

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ELECTION

From an election standpoint, I wouldn’t want to be president with these economic clouds on the horizon.  It could spell a tough first year for whomever is in the White House.  

As it stands now, the market is leaning towards a Trump win, but it’s still anyone’s guess how it will play out. 

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CORPORATE EARNINGS

Earnings for the third quarter started coming in this month and we are about halfway through the stocks in the S&P 500.  

Companies still look to be doing well.  Earnings are growing at a nice pace and revenue has been solid, although the bar was set pretty low for these results.

A lot of focus has been on the big tech names, which have driven a lot of the gains in the market. Of the results so far, all have performed well – but there has been one concern that sent their stocks lower.  The amount of money they are spending on building AI programs is very, very high.  It may pay off in the long run, but investors are concerned at this time.  

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INFLATION

Let’s switch back to economic data and look at the inflation data from this month, where the annual inflation rate continues to move lower.

But that’s looking at inflation from an annualized measurement (counting the previous 12-month numbers).  When you look at inflation month-by-month, inflation is still rising, just not as quickly.  That means prices are still going up, just not as fast.

When excluding energy and food from the calculation (which economists call the “core” measurement), we can see inflation still rising solidly every month. 

The PPI, which is the inflation at the business level before they pass on the price increases to us, rose again last month. 

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OTHER ECONOMIC DATA

There were some bright spots in the other economic data released this month.

The GDP for the third quarter showed a decent gain of 2.8%. 

Jobs data released this month was decent, too.

However, excluding government jobs, the picture is less-rosy.

The level of job openings continues to decline, too.  This is concerning because the stock market and level of job openings tend to move together.

As for the strength of the manufacturing and service parts of our economy, both saw an improvement last month.

Retail sales saw a slight increase on the month. 

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a decline.

Consumer confidence saw a nice increase:

Small business optimism moved slightly higher, too:

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Where does the market go from here?

The market is looking more attractive here.  However, there will be a lot to move markets in the coming weeks.  Next week, in particular, will have a great impact for the market with the election and the Fed meeting.  

Regardless of who wins the election, stocks tend to rise from here through the end of the year. 

One concern we have is that EVERYONE thinks the market will go higher from here.  When investors get too optimistic (or pessimistic), markets tend to do the opposite of what everyone thinks.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.