STOCK MARKETS COME ROARING BACK DURING BUSY WEEK OF EARNINGS REPORTS AND AS FED LEAVES RATES UNCHANGED

Weekly Market Update — November 4, 2023

• Stock markets came roaring back on the second busiest week of earnings reporting for this Q3 season, which was generally received as positive
• When the week was over, the smaller caps leapt an astonishing +7.6% putting the index at break-even for the year while NASDAQ jumped +6.6%, the large-cap S&P 500 leaped +5.9% and the mega-cap DJIA advanced +5.1%
• The Fed met this week and voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%
• Fed Chair Jerome Powell’s press conference was arguably less hawkish relative to past comments and hopes that the Fed might be done raising rates increased within Wall Street
• Wall Street is also not pricing in any more rate hikes over the next year and instead is actually pricing in two rate cuts over the next 12 months, according to the CME FedWatch Tool
• The 10-year Treasury yield declined 31 basis points to 4.51% and the 2-year Treasury fell 17 basis points to 4.86%
• All 11 S&P 500 sectors advanced, with Real Estate (+8.6%) leading the pack, followed by Financials (+7.4%) and Consumer Discretionary (+7.2%), with Energy (+2.3%) bringing up the rear
• The ISM Manufacturing Index contracted at a faster pace in October and the October jobs report showed slower payroll growth, rising unemployment, and slower wage growth
• The US Dollar Index fell 1.4% to 105.04

*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.

Stock Markets Leap as Fed Leaves Rates Alone

Equity markets jumped this week as the S&P 500 Index recorded its strongest weekly gain in almost a year and as the smaller-cap Russell 2000 clawed back to break-even YTD with an astonishing weekly gain of +7.6%, its best weekly performance since October of 2022. In addition, NASDAQ’s +6.6% jump and the S&P 500’s +5.9% gain pulled them both out of correction territory.

Driving this week’s spectacular gains was the policy statement from the Fed that was perceived as dovish which helped to drive a sharp decrease in long-term bond yields. The Fed left rates steady, as expected, but traders were encouraged by the Fed’s statement, which signaled that the recent runup in long-term Treasury yields had achieved some of Fed’s intended tightening. Wall Street is also not pricing in any more rate hikes over the next year and instead is actually pricing in two rate cuts over the next 12 months, according to the CME FedWatch Tool.

Not surprisingly, growth stocks trounced value names, smaller-caps outpaced the larger names and the interest-rate sensitive sectors led all (think Financials and Real Estate).

It was a very busy earnings week and some suggested that institutional investors were taking tax losses ahead of the month-end as “window dressing.”

There was a ton of economic data this week, including that:

• Total construction spending increased 0.4% month-over-month in September after increasing an upwardly revised 1.0% (from 0.5%) in August.
• Total private construction was up 0.4% month-over-month while total public construction also increased 0.4% month-over-month.

• On a year-over-year basis, total construction spending was up 8.7%.
• Total residential spending increased 0.6% month-over-month while total nonresidential spending rose 0.3% month-over-month.
• In private construction, residential spending jumped 0.6%, led by a 1.3% increase in new single-family construction. Nonresidential spending was up 0.1%, led by a 0.6% increase in commercial spending and a 0.4% increase in power spending.
• In public construction, nonresidential spending increased 0.5%, paced by a 1.9% increase in educational spending.

• The October ISM Manufacturing PMI came in at 46.7% down from 49.0% in September (the dividing line between expansion and contraction is 50.0%)
• October marked the 12th straight month the PMI reading has been below 50.0%.

• The New Orders Index dipped fell to 45.5% from 49.2%.
• The Prices Index rose to 45.1% from 43.8%.
• The Backlog of Orders Index dipped to 42.2% from 42.4%.
• The Supplier Deliveries Index increased to 47.7% from 46.4%.
• The Production Index decreased to 50.4% from 52.5%.
• The New Export Orders Index jumped to 49.4% from 47.4%.
• The Employment Index dropped to 46.8% from 51.2%.

Global Markets Drop in October

Tuesday marked the end of the month and stock markets in the U.S. and around the world dropped in October, as the smaller-cap and tech names were hit hardest. Unfortunately, October’s tough performance was very similar to what happened in September and August.

Specifically, the S&P 500 marked its third-straight month of declines and is down 9.4% over the last three months, its worst three-month period since April to June 2022 and its longest monthly losing streak since March 2020. And NASDAQ just recorded its worst October performance since 2018 and the tech-heavy index is down more than 11% over the last three months, its worst three-month percentage decline since the August-October period in 2022. And the DJIA just recorded its longest monthly losing streak since March 2020.

For the month of October:

• The DJIA retreated 1.1%;
• The S&P 500 lost 2.2%;
• NASDAQ declined 3.4%; and
• The Russell 2000 dropped 5.4%.

U.S. Consumer Confidence Fell Again in October

The Conference Board Consumer Confidence Index declined moderately in October to 102.6 (1985=100), down from an upwardly revised 104.3 in September.

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – declined to 143.1 (1985=100) from 146.2.
• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – fell slightly to 75.6 (1985=100) in October, after declining to 76.4 in September.
• The Expectations index is still below 80 – the level that historically signals a recession within the next year.
• Consumer fears of an impending recession remain elevated, consistent with the short and shallow economic contraction we anticipate for the first half of 2024.

“Consumer confidence fell again in October 2023, marking three consecutive months of decline. October’s retreat reflected pullbacks in both the Present Situation and Expectations Index. Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular. Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East. The decline in consumer confidence was evident across householders aged 35 and up, and not limited to any one income group.”Consumers’ assessment of their Family’s Current Financial Situation improved slightly in October.

Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months remain elevated.

Compensation Costs Rise

On Tuesday, the U.S. Bureau of Labor Statistics reported that compensation costs for civilian workers increased 1.1%, seasonally adjusted, for the 3-month period ending in September 2023. Wages and salaries increased 1.2% and benefit costs increased 0.9% from June 2023.

In addition, compensation costs for civilian workers increased 4.3% for the 12-month period ending in September 2023 and increased 5.0% in September 2022. Wages and salaries increased 4.6% for the 12-month period ending in September 2023 and increased 5.1% for the 12-month period ending in September 2022. Benefit costs increased 4.1% over the year and increased 4.9% for the 12-month period ending in September 2022.

Among private industry occupational groups, compensation cost increases for the 12-month period ending in September 2023 ranged from 3.9% for production, transportation, and material moving occupations to 4.5% for service occupations. Within industry supersectors, compensation cost increases ranged from 3.7% for manufacturing to 4.9% for both education and health services and for other services, except public administration.

Compensation costs for state and local government workers increased 4.8% for the 12-month period ending in September 2023, compared with an increase of 4.6% in September 2022. Wages and salaries increased 4.8% for the 12-month period ending in September 2023 and increased 4.4% a year ago. Benefit costs increased 4.7% for the 12-month period ending in September 2023. The prior year increase was 5.0%.

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