October was choppy following the correction in September, as we expected. There is a lot going on in the world which gives many reasons for concern. But the stock market appears to be singularly focused on interest rates and inflation.
In early October the market moved up and appeared to be recovering from the September correction. On October 19th, Fed Reserve Chairman Powell spoke to the Economic Club of NY. His comments were neither new nor exciting. He confirmed that the Board’s goal continues to be to return the economy to a 2% inflation rate. He left open whether that will require more rate increases and when. This uncertainty sent the market into another dive. You can count on the market to run away from uncertainty. Two data reports were released about the same time. Jobless numbers declined in September and according to treasury.gov, GDP grew at the fastest rate since late 2021. Investors received good news as bad news. A strong economy would most likely mean more rate increases to come.
In response the yield on the 10 Year Treasury reached 5% on October 19th. The major stock indexes fell steadily for the last full week of the month and the S&P 500 Index pierced the 4200 point mark which has served as support since early June. Bearish sentiment and investor fear were palpable with eight down days out of nine.
We watch historically reliable indicators and avoid emotional forecasting. We can see a light at the end of the tunnel. Credit spreads remain tight and consumer discretionary stocks are favored over their defensive cousins, the consumer staples. Both indicators point to a continued appetite for risk and are positive for stocks. By Friday, October 27th the stock market was heavily oversold and bond yields were stretched to a high last seen in 2007.
On Monday, October 30th as the Federal Reserve was about to meet for the next to the last time this year, the market went up and bond yields began to pull back. Stocks have put in an impressive recovery since October 30th and the yield on the 10 Year Treasury dropped a half a percent in five trading days.
Chairman Powell spoke on November 1st and confirmed that rates would not increase this month. Investors interpreted his further comments to mean there will probably not be a rate increase in December. Following the Board’s decision, new jobs numbers came in a little cooler for September. Investors grabbed that data as further confirmation that rates are not likely to rise again this year.
Is there more opportunity or more risk in the near term? That’s the question. We see opportunity and this recent rally is encouraging. We have entered the best 3 months for the stock market and right now seasonality favors the bulls. Only time will tell if the correction is behind us, but if the indicators continue to point to opportunity, we plan to be ready. If the indicators change, our outlook will become more defensive.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.