EQUITIES RETREAT AS GEOPOLITICAL WORRIES INCREASE, DYSFUNCTION HITS CONGRESS AND LONG-TREASURIES HIT LEVELS NOT SEEN SINCE 2007

Weekly Market Update — October 20, 2023

• This was a rough week for equities and bonds, as seemingly every asset class retreated, as there was some risk aversion related to the Israel-Hamas war
• When the week was over, the major U.S. equity indices were all red, as the tech-laden NASDAQ dropped 3.2%, the S&P 500 lost 2.4%, the smaller-cap Russell 2000 retreated 2.3% and the mega-cap DJIA gave back 1.6%
• It was also the week that saw both the DJIA and Russell 2000 enter negative territory for the YTD and NASDAQ come very close to entering bear market territory
• U.S. Treasuries were also volatile this week as the 10-year Treasury breached 5.00% for the first time since 2007
• On Friday’s final bell, the 10-year Treasury ended the week up 29 basis points to 4.92% and the 2-year Treasury ended the week at 5.09%
• Fed Chair Jerome Powell gave a speech at the Economic Club of New York on Thursday and he suggested that the rise in long-term rates has helped to tighten financial conditions, which will cause the Fed to proceed cautiously
• Retail sales were stronger than expected and weekly initial jobless claims came in at their lowest level since January
• The existing home sales report was the weakest since October 2010 and the Leading Indicators index was negative for the 18th consecutive month
• Of the 11 S&P 500 sectors, only 2 advanced as Consumer Staples (+0.7%) and Energy (+0.7%) were green
• Of the 9 sectors that declined, Real Estate (-4.6%) and Consumer Discretionary (-4.4%) were the worst performers

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks & Equities Retreat on Israel-Hamas War

The Israel-Hamas War, dysfunction in the House of Representatives, a still-hawkish Fed and rising yields weighed heavily on Wall Street and pushed the S&P 500 to its worst weekly decline in over a month. And although NASDAQ is still very positive for the YTD, shockingly it is very close to bear market territory, ending the week 19.91% below its early-2022 intraday highs.

Not surprisingly, Value stocks outperformed Growth stocks and 9 of the 11 S&P 500 sectors dropped. And the tech names were hit hard as the yield on the 10-year U.S. Treasury breached 5%, its highest level since July 2007.

There was also a lot of economic data this week, most of it mixed, including that:

• Total industrial production increased 0.3% month-over-month in September following a downwardly revised unchanged (from 0.4%) in August.
• The capacity utilization rate jumped to 79.7% from a downwardly revised 79.5% (from 79.7%) in August.
• Total industrial production was up 0.1% yr/yr.
• The capacity utilization rate of 79.7% was in-line with its long-run average.

• Housing starts increased 7.0% month-over-month in September to a seasonally adjusted annual rate of 1.358 million units.
• Building permits declined 4.4% month-over-month to a seasonally adjusted annual rate of 1.473 million.
• The change in single-unit starts by region: Northeast (-19.0%); Midwest (+14.2%); South (+2.8%); and West (+5.2%).
• The number of units under construction at the end of the period declined 0.7% month-over-month to a seasonally adjusted annual rate of 1.676 million.

Treasury Budget Shows A Surplus in August

The August Treasury Budget showed a surprising surplus of $89.2 billion compared to a deficit of $219.6b in the same period a year ago. More specifically, the surplus in August resulted from receipts ($283.1 billion) exceeding outlays ($193.9 billion). August typically shows a budget deficit (68 times out of 69 fiscal years) since there are no major tax due dates.

In addition:

• Receipts from Individual Income Taxes were $130 billion. Social Insurance & Retirement receipts totaled $121 billion.
• The largest outlay by function was Social Security ($116 billion) followed by Medicare ($73 billion), Health ($71 billion), National Defense ($70 billion), and Net Interest ($69 billion).
• The fiscal year-to-date deficit is $1.52 trillion versus $1.61 trillion in July.
• The budget deficit for the last 12 months is $1.95 trillion versus $2.26 trillion in July.

Retail Sales Up in September 2023

On Tuesday, the U.S. Census Bureau announced the following advance estimates of U.S. retail and food services sales for September 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.9 billion, up 0.7% from the previous month, and up 3.8% above September 2022.

Further:

• Total sales for the July 2023 through September 2023 period were up 3.1% from the same period a year ago.
• The July 2023 to August 2023 percent change was revised from up 0.6% to up 0.8%.
• Retail trade sales were up 0.7% from August 2023, and up 3.0% above last year.
• Nonstore retailers were up 8.4% from last year.
• Food services and drinking places were up 9.2% from September 2022.

census.gov ;msci.com;fidelity.com;nasdaq.com;wsj.com; morningstar.com;