November 4, 2024
Following more settled conditions in September, October saw the return of volatility with negative performance across equities and fixed income alike. The euphoria of the jumbo 50 bps cut in US interest rates in September was quickly digested by the market. Uncertainty was also heightened by the upcoming US election and the potential implications of a policy shift on inflation and interest rates. Stocks fell in October with the S&P 500 ending a five-month streak of gains and the Nasdaq Composite marking its first monthly drop in three months. Treasuries saw significant declines, with yields increasing sharply across the curve. The 2-year yield rose over 50 basis points, returning to levels above 2.15%, while the 10-year yield climbed close to 4.30%. In fixed income markets, the resilience of the US economy and uncertainty surrounding potential post-election policy changes prompted a more gradual re-pricing of the anticipated Fed rate cuts. The Barclays Global Aggregate Index returned -3.4%. The dollar index rose 3.1%, marking its first gain in four months, while gold continued its upward trend with a fourth-straight monthly increase reaching a high of USD 2787. Other assets like Bitcoin and WTI crude oil also saw gains, with Bitcoin futures up 11% and crude oil rising by 1.6%.
Economic data in October presented a mixed picture. The September payroll report surpassed expectations, adding 254,000 jobs compared to the consensus forecast of 150,000. However, other labor market indicators suggested some softening, with JOLTS job openings dropping to their lowest level since January 2021. Consumer confidence saw a slight improvement, breaking an eight month streak of declines in sentiment regarding the labor market. Inflation data was more complex, with September’s core CPI coming in hotter than expected. Headline CPI increased by 0.2% month-over-month and 2.4% year-over-year, marking the slowest annual rise since early 2021. The core inflation remained high at 3.3%. However, the final Michigan survey revealed a drop in one
year inflation expectations to their lowest levels of the year. The US economy expanded at a rate of 2.8% in the July to September quarter, slightly falling short of estimates and the 3% growth recorded in the second quarter. This combination of strong growth signals alongside tentative signs of disinflation has led to a reassessment of the pace and quantum of Federal Reserve rate cut. While rate cuts are still expected in November and possibly December, the combination of a robust labor market and ongoing inflation has reduced the likelihood of a 50 bp reduction at these meetings. Traders are now anticipating five Fed rate cuts between now and the end of 2025, down from eight at the start of the month with expectations of a terminal Fed rate at 3.5%-3.75% as compared to 2.8% earlier.
The cooling in rate cut expectations, alongside election uncertainty, pushed 2-year and 10-year Treasury yields above 4.0%. In aggregate, US Treasuries returned -2.4% for the month. The Barclays Global Aggregate Index posted a return of -3.4%. Credit markets showed some weakness despite strong underlying fundamentals. Emerging Market Debt (EMD) finished the month down 1.8%, weighed down by a strong US dollar. The global government bond index fell 3.7%, reflecting uncertainty over the direction of global interest rate cuts. This decline also mirrored the effects of a strong US dollar. Year-to-date, US investment-grade (IG) bond yields have fluctuated within a 100-basis point range (4.9% to 5.9%) and are currently near the midpoint. Overall, the indices for investment-grade (IG) bonds saw negative returns, with US IG bonds dropping -2.2% and European IG bonds falling -0.4%. The increase in yields month-to-date, combined with light supply and supportive equity markets, has helped tighten spreads to their current levels, with these drivers showing no signs of easing. The strength of the US economy, along with Donald Trump’s rising poll numbers and his perceived more inflationary policy agenda, has led to higher US bond yields and overall negative performance of the bond market.
Equities started in October on a positive note, buoyed by strong economic data from the US and third-quarter earnings reports that exceeded expectations. However, this upward momentum was quickly interrupted as geopolitical tensions escalated, particularly between Iran and Israel. Growing risk aversion drove market volatility and led to the outperformance of certain sectors, such as energy (driven by oil prices), financials (with expectations of a Trump victory), and utilities (a defensive sector). This shift in sentiment ended a five-month streak of gains for the MSCI World index. The MSCI World Index (in dollars) fell by -2.0% in October, while US equities outperformed Europe. The S&P 500 dropped -1.0%, compared to a -3.3% decline for the Stoxx Europe 600 index in local currencies. The “great rotation” seen in July, where small-cap stocks (Russell 2000) outperformed large-cap technology stocks (Nasdaq 100), partially reversed in October. The Russell 2000 posted a return of -1.5%, while the Nasdaq 100 fell by -0.5%. Sector performance was mixed, with healthcare and consumer goods sectors experiencing the largest declines, driven by their sensitivity to rising bond yields and other sector-specific challenges.
October also marked the Q3 corporate earnings result driving the markets. With 70% of S&P 500 companies having reported Q3 2024 earnings, the results have been mixed. So far, 52% of companies have exceeded revenue expectations, 30% have missed, and 18% have met estimates. The average revenue beat has been 1.5%. On the earnings side, nearly 75% of companies have surpassed EPS estimates, slightly below the 5-year average of 77%, but in line with the 10-year average. Health Care stocks saw the biggest top-line outperformance, with an average beat of about 3.3%, followed by Financials at 2.2%. In terms of EPS, Communications stocks had the largest surprises, with an average beat of 14.1%, followed by Consumer Discretionary at 11.8%, and Financials at 9.3%. On the growth front, 72% of companies have reported revenue growth, while 23% saw declines and 5% remained flat, with an average growth rate of 5.3%. Energy and Industrials saw negative revenue growth, with declines of -4.7% and -0.2%, respectively. Earnings from Big Tech companies presented a mixed picture. Microsoft and Meta saw declines, primarily due to high spending projections for AI initiatives, which overshadowed otherwise solid revenue results. Microsoft’s cloud business, in particular, forecast slower growth, while Meta’s cautious approach to spending raised concerns in the market. In contrast, Amazon rose 6% after reporting strong earnings, driven by robust e-commerce performance and an optimistic outlook. Apple’s results were dampened by weaker-than-expected demand for its new AI-enhanced iPhone in China, highlighting challenges in this key market for the company.
In Europe, the Stoxx Europe 600 index dropped by 1.6% in October. Eurozone inflation fell to 1.7% in September, dipping below the European Central Bank’s (ECB) 2% target for the first time in three years. This trend was seen across major economies like Germany, France, and Italy, where inflation also dropped below the ECB’s target. As expected, the ECB lowered its interest rate by 0.25% to 3.25%, marking the first back-to-back rate cut in 13 years. Economic activity in the Eurozone continued to contract in October, with new orders and business confidence declining for the fifth month in a row. In the UK, the FTSE 100 index fell by 1.2% for the month, primarily driven by losses in the energy sector and falling oil prices, which hurt
companies like BP. The UK’s annual inflation rate eased to a three-year low of 1.7% in September, down from 2.2% in the previous two months, falling below the Bank of England’s 2% target. The UK budget was unveiled with higher-than-expected borrowing and taxes. The expectation now is for the economy to grow by just over 1% this year and 2% next year. Analysts widely expect the Bank of England to reduce interest rates by a quarter-point when it meets on November 7. In Japan, the Yen weakened after the ruling coalition failed to secure a parliamentary majority in recent elections. This led to a decline in the Yen against the US dollar, Euro, and Swiss Franc. The weaker currency provided a boost to Japan’s export-focused stocks, driving the Nikkei 225 index up nearly +3.1%%. At its October meeting, the BoJ held its policy rate steady at 0.25%, as widely expected. Emerging market equities, which had surged in September following China’s stimulus announcement, underperformed developed markets, falling -4.4%. The Hang Seng Index (HSI) in China dropped by -3.9%. Emerging markets were further pressured by the dollar’s rebound and the possibility of a Trump election victory, with his protectionist stance raising concerns about trade relations with China and other countries. Additionally, the lack of immediate signs of recovery in China’s economy, despite recent fiscal and monetary measures, disappointed markets. However, the first batch of major economic indicators after the rollout of Beijing’s broad stimulus package indicated early signs of recovery in the Chinese economy. In the property sector, the value of new home sales by the country’s top 100 developers rose 7.1% from a year ago after September’s 37.7% drop, marking the first year-on-year growth in 2024, according to the China Real Estate Information Corp. China’s factory activity expanded for the first time since April amid better demand. The official manufacturing purchasing managers’ index (PMI) rose to an above-consensus 50.1 in October from 49.8 in September.
In commodities markets, Gold continues its stellar run for the year finishing October at $2744 an ounce or higher by 3.51%. WTI crude traded higher by 2.35% finishing at $69.26 after a very volatile month with concerns over macroeconomic risks and falling demand balanced against ongoing geopolitical tensions in the Middle East. Overall, the commodity index dropped 1.9% in October. In October, the dollar strengthened against most major currencies, driven by expectations of a Republican election victory and a still-resilient US economy, both of which pushed bond yields higher. Meanwhile, European economic data remained weak, and concerns over political and budgetary risks in France persisted. As a result, the dollar gained over 2% against the euro and 6% against the yen. Expectation of a Trump victory once again brought interest in crypto currencies back in the forefront with Bitcoin ending 11% up for the month.
Despite the mixed macroeconomic signals, the greatest source of uncertainty in the coming months remains the upcoming election, as political instability has begun to weigh on market sentiment. Investors are closely monitoring political platforms and their potential impacts on trade, fiscal policy, and regulatory changes, especially as polling numbers tighten. Though the race for President is very tight, markets seem to have mostly positioned themselves for a Donald Trump victory. A clean Republican sweep of the White House and Congress would create space for unfettered ‘America First’ tax, tariff, immigration and deregulation policies. This would in turn, be positive for US equities and the dollar, at least in the short term. Lower taxes and lighter regulation would generate higher nominal US growth and inflation. This would keep interest rates restrictive, although a 25-basis point cut from the Federal Reserve this week seems to be a done deal. A tax-cutting, low-regulation approach are likely to boost technology stocks, banks and the defence sector. A less likely outcome would be a Trump win with a divided Congress, pushing inflation higher through tariffs, and keeping rates elevated, without the benefit of higher growth. Once the election-related uncertainties are resolved, markets may see greater clarity, which could provide relief and set the stage for post-election adjustments and potential realignments.
Just two days after the election, the Federal Open Market Committee (FOMC) will convene, with expectations that they will reduce the Fed Funds rate by another 25 basis points. Many investors were caught off guard when the Fed cut rates by 50 basis points at their last meeting, only to see rates rebound quickly afterward, so it will be interesting to see how the market reacts to this potential smaller cut. Additionally, a series of key economic data releases throughout the month will likely influence the Fed’s decisions in their December meeting.
With the increased volatility due to the US Elections, cash as “dry powder” in the portfolio to take advantage of any potential pull back in the markets to accumulate quality assets.
