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Monthly Market Newsletter, October 2023

Monthly Market Newsletter, October 2023

December 08, 2023

November has arrived. At the start of this month, all eyes were focused on whether the Federal Reserve (Fed) would hike interest rates for a fifth time this year or hold rates steady. The Fed’s decision to leave interest rates unchanged has eased concerns about any additional rate hikes in 2023, increasing the likelihood that the economy will have a “soft landing” and avoid a recession, at least in the near future. Consumer spending levels have remained strong, especially on discretionary items such as travel and entertainment. However, consumers’ confidence in the economy is decreasing. The Consumer Confidence Index fell for a third straight month, indicating consumers still expect a recession is on the horizon. 

The road to the Fed’s 2% inflation target rate won’t be smooth, according to Fed Chair Jerome Powell. Interest rates are expected to remain high into 2024, leading to the potential for more layoffs and lower-than-expected wage growth. Higher borrowing costs are already affecting big-ticket purchases, such as home sales. For the first time since 2020, the average interest rate for a 30-year fixed-rate mortgage hit 8%, making affordable new housing unattainable for many. 

Though falling home sales and high interest rates indicate the U.S. economy is slowing, the labor market has remained resilient. In September, 336,000 jobs were added to the economy, more than double economists’ original estimate of 170,000 new jobs. U.S. wages are also up 4.2% year-over-year, and unemployment remains steady at 3.8%. 

November is Long-Term Care (LTC) Awareness Month. LTC insurance is a critical but often overlooked component of retirement planning. The U.S. Department of Health and Human Services estimates that 70 percent of 65-year-olds will need some type of long-term care. Medicare usually doesn’t cover long-term care services like assisted living or skilled nursing care. Without proper planning, the burden of providing elder care and nursing services often falls to a spouse or another family member. A plan for LTC coverage can help minimize the financial and emotional impacts on your loved ones if you end up needing these services. If you would like to see if LTC coverage makes sense for you, your family, and your financial future, contact us to review your options. 

As Thanksgiving approaches, we find ourselves reflecting on the past year and looking forward to new beginnings. We enjoy helping others feel good about their financial situation and are so thankful for wonderful clients like you. Wishing you a November filled with the love of family and friends, delicious food, and a heart full of gratitude.  

Stocks

Halloween was not the only spooky occurrence investors confronted in October. The three major U.S. equity indices – the S&P 500, the Dow Jones, and the NASDAQ – all sold off over 1%, continuing the losing streak that began back in August. The most significant contributor to the drop in equity prices was the increase in the interest rate, as measured by the 10-year U.S. Treasury bond. Higher bond yields make servicing debt more expensive for companies and drive down their bottom line. Earnings season also kicked off this month, with over 50% of companies releasing their financials for the third quarter. Results have been a treat, not a trick thus far, with earnings growing by 2.91% compared to last year, beating expectations by 7.83%. Markets have also shown much more volatility in October, with the S&P 500 being up over 2.0% at times, as well as down over 3.5%.

Sector Performance

Only one sector (Utilities) posted a positive monthly return in October. Consumer Discretionary, Energy, and Health Care led the way downward for the month. Energy fell on news of negative earnings surprises and the recent slump in oil price, now down to $87.41 (-5.20% on the month). Despite an early month increase in oil prices after the Middle East conflict erupted, hopes that the conflict will remain contained have kept a lid on oil prices. Both the Health Care and Consumer Discretionary sectors fell as bond yields continued to rise, calling into question their profit margins moving forward. As fears of a recession grew, Utilities and Consumer Staples protected investors, and money moved into defense stocks, which tend to hold up better in those environments. Technology also held up well compared to its peers. Large tech companies have large cash reserves on hand, meaning as rates rise, they make money that pads their earnings (which have been impressive on the quarter thus far).

Bonds

Bonds also had a lackluster month, with the Bloomberg US Agg Bond Index falling -1.58% in October. Although the 2-year yield fell 5 bps, the 10-year rose 17 bps, as the higher-for-longer narrative became emboldened in investors' minds; the 10-year yield even briefly crossed the 5% threshold for the first time since July 2007. Some of the Federal Reserve speakers have mentioned that the rate hiking cycle may be done. Still, all have emphasized that rate cuts will likely not be seen until well into next year. This point was driven home by a slew of stronger-than-anticipated economic data throughout the month. The Federal Reserve Open Market Committee (FOMC) meets on the first of November to decide the path of interest rates moving forward. The futures market is pricing in a 98%+ chance that the Fed holds rates steady.[i] If bonds were to end the year where they ended October, it would mark the longest stretch of down years since 1787 – the same year the U.S. Constitution was signed.[ii]

[i]CME FedWatch Tool - CME Group
[ii]CHART OF THE DAY: US Treasurys on Track for Longest Slump Since 1787 (businessinsider.com)

Economic Update

October was a strong month for the economy, with nearly all the economic indicators coming in stronger than anticipated. On the labor front, the economy added jobs for its 33rd consecutive month, growing by 336,000. The number of job openings increased by 690,000, moving upward to 9.61 million, surpassing expectations of 8.80 million as employers, by and large, continue to hire. Also heating up was inflation, with headline inflation remaining at 3.7% (0.1% above expectations). However, core inflation, which excludes food and energy, fell to 4.1%, which was in line with analyst expectations. Additionally, GDP for the third quarter came in at a preliminary 4.9%. This was more than double last quarter's number, and over 0.5% above what the general forecast was. Finally, retail sales increased 0.7% on the month, more than doubling analyst projections of 0.3%. The overall picture was that the economy continues to remain strong, which puts upward pressure on inflation and, in turn, interest rates (thus constraining the upside to bond and equity returns).

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Abandoned Coal Mines
Provide Green Energy Source

Once seen as a source of danger and contamination, abandoned coal mines are now providing opportunities for green, renewable heating and cooling. The town of Gateshead, in England, launched a mine water project in March 2023 that has successfully been heating their town ever since.

Hundreds of miles of abandoned coal mining tunnels contain a semi-naturally occurring geothermal energy source waiting to be harvested. When flooded with water, the earth’s core turns the mine into a hot-water resource. The water is pumped into homes and commercial building heat pumps, further raising the temperature to heat interior spaces.

The water is then sent back down to the mine, where it’s naturally reheated, and the process begins again. This model is not just being used in Britain but also in The Netherlands, Spain, and Canada as well. The potential impact is significant. To read more about this exciting project, click here.

THOUGHT FOR THE MONTH

Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Dow Jones U.S. Real Estate Total Return Index: The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.

NASDAQ Composite: The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector. 

S&P 500 Bond Index: The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.

S&P 500 Consumer Discretionary: The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.

S&P 500 Consumer Staples: The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.

S&P 500 Energy: The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.

S&P 500 Financials: The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.

S&P 500 Index: The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.

S&P 500 Utilities: The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.

S&P U.S. Aggregate Bond Index: The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.

S&P U.S. Treasury Bond Index: The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.

Disclosures 

PLEASE NOTE: When you link to any of the websites displayed within this email, you are leaving this email and assume total responsibility and risk for your use of the website you are linking to. We make no representation as to the completeness or accuracy of any information provided at these websites.

A portion of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results. 

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

The statements provided herein are based solely on the opinions of the Osaic Research Team and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Osaic or its affiliates.

Certain information may be based on information received from sources the Osaic Research Team considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of the Osaic Research Team only as of the date of this document and are subject to change without notice. Osaic has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Osaic is not soliciting or recommending any action based on any information in this document.