What happened in the markets - 23-27 Oct 2023
Introduction
Hey Gotraders,
The stock market has been on a rollercoaster ride again!
The S&P 500 Index took a nosedive into correction territory. Why, you ask? Well, the market is playing defence against concerns over high interest rates and the uncertain path of the economy. For two consecutive weeks, the major U.S. stock benchmarks have been closing lower. The culprit? A mixed bag of corporate earnings reports and worries about soaring interest rates. To add fuel to the fire, the yield on the benchmark 10-year U.S. Treasury note briefly breached the 5% level for the first time in 16 years. Talk about a blast from the past!
Key Takeaways
Stocks have entered a correction phase, declining approximately 10% from their peak in late July. This is due to a recent increase in long-term government bond yields and mixed earnings reports from large-cap technology companies.
The closely followed yield of the 10-year US Treasury note crossed above the 5% level for the first time since July 2007.
Analysts advise to take advantage of the situation and consider adding high-quality investments at lower prices, while maintaining realistic expectations for returns and volatility.
Stocks Fall Again, S&P Enters Correction Territory
The S&P 500 Index (SPX) took a nosedive into correction territory on Friday, falling more than 10% from its recent peak. Investors are on high alert due to concerns over soaring interest rates and the economy. However, tech shares offered a glimmer of hope as the Nasdaq Composite (COMP) managed to secure a modest gain, thanks to better-than-expected earnings from some mega-cap shares. Friday's economic and inflation readings didn't throw any major curveballs, but they did little to shake the market's belief that the Federal Reserve might have finished hiking rates. However, the September Personal Consumption Expenditure (PCE) report, the Fed's preferred inflation monitor, revealed slightly higher-than-expected figures, reminding us that inflation is still above the Fed's long-term target. "Stocks appear to be going through a re-pricing of risk due to rising economic and geopolitical uncertainties and the likelihood of a 'higher-for-longer' rate outlook," says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "Near-term, the market is oversold, so it's possible we could get a reflexive bounce any day, even though there was a lot of technical damage this week." However, Peterson warns that "plenty of market-moving catalysts next week—including the October Employment Report on Friday—so volatility will likely remain elevated in the near-term." Banking and energy sectors were among the hardest hit on Friday, with the latter feeling the pressure despite strength in crude oil futures. Another downturn in small-cap stocks suggests that investors are growing increasingly worried about the economy, as the Russell 2000 Index (RUT) closed at its lowest level in nearly three years and dropped 2.6% for the week.
The recent rollercoaster ride in the stock market has seen the S&P 500's price-to-earnings ratio (based on the next 12-month earnings estimates) take a dip from 19 to 17.4. Now, you might be thinking, "That's still not exactly a bargain!" And you'd be right if you're only looking at the surface. But dig a little deeper, and you'll find some hidden gems. Take the S&P 500 Equal Weighted Index, for instance. It's currently trading at a much more attractive 14 times earnings. And if you're a fan of value investing, you're in for a treat. The Russell 1000 Value index, a proxy for value style investments, is trading at a mere 13 times earnings. But what about the "Magnificent Seven," you ask? Well, they're still holding court at a lofty 30 times earnings. So, while the overall market might not seem cheap relative to current bond yields, there are definitely pockets of value to be found if you know where to look.
Third-quarter economic growth hotter than expected
As we wrap up the week, let's dive into some of the key economic highlights that have been making headlines.
U.S. Economy Grows at 4.9% in Q3 The U.S. economy has been flexing its muscles, growing at an annualized pace of 4.9% in the third quarter. This is the strongest performance we've seen since the end of 2021 and more than double the growth rate of the second quarter. The driving force behind this growth? Strong consumer spending.
Home Sales Reach 19-Month High In other positive news, home sales have reached a 19-month high. This, coupled with the uptick in S&P Global's flash U.S. Composite Purchasing Managers’ Index (PMI) from September, paints a promising picture of the U.S. economy.
Mixed Signals from Core PCE Price Index The core personal consumption expenditures (PCE) price index, the Federal Reserve's go-to inflation gauge, has been sending mixed signals. On a monthly basis, the core PCE (which excludes volatile food and energy costs) rose to 0.3% in September, up from 0.1% in August. However, the year-over-year measure slightly decreased to 3.7% in September from 3.8% previously.
While these figures show inflation remaining well above the Fed's 2% long-term inflation goal, the central bank is widely expected to keep rates steady at its October 31-November 1 policy meeting.
Earnings are rebounding
After three consecutive quarters in the red, corporate profits are making a comeback in the third quarter and are projected to continue improving through 2024. Thanks to robust demand, we're seeing a resurgence in revenue growth, while the drop in material and input costs is likely to boost profitability. Analysts are predicting a 12% growth next year, which might be a tad too optimistic. However, unlike last year's profit decline, rising earnings are expected to bolster stock prices.
Signs that the worst in manufacturing activity is over
Manufacturing activity, which has been contracting for most of the past year, is showing signs of recovery. The S&P Global PMI survey released last week indicates that manufacturing is back in expansion territory in October. Although manufacturing is a smaller part of the economy compared to services, it's a crucial signal as it often points to potential turning points in the economy.
Increase in oil prices remains contained
Geopolitical uncertainty recently pushed WTI oil above $90 a barrel due to fears of supply disruption. However, prices have now slightly dipped below last year's, suggesting that energy will have a neutral to slightly negative impact on October's inflation reading.
There is less investor complacency
Investor sentiment, which was overwhelmingly positive and even euphoric during the summer months, has taken a darker turn recently. This shift in emotions is reflected in the AAII Investor Sentiment Survey, which showed a bulls-to-bears ratio of 2 in July versus a 0.68 ratio currently. Sentiment tends to be a contrarian indicator, with complacency often leading to market corrections, while skepticism provides the fuel for equities to climb the proverbial wall of worry.
Seasonal factors turn positive in November and December While it's true that fundamental conditions drive market returns, not the calendar, history shows that there are some seasonal patterns to returns. Since 1945, November and December have typically been good months for stocks, with the S&P 500 achieving above-average gains and the highest chances of positive returns.
10-year U.S. Treasury yield pulls back from 5% level
The yield on the 10-year U.S. Treasury note, after crossing the 5% threshold on Monday, has been on a downward trend. It was trading around 4.8% at the end of the week. Quite a rollercoaster ride, huh? The tax-exempt municipal bonds industry wasn't having the best of times either. It saw continued outflows, and the higher-than-average net supply continued to pose challenges. However, it wasn't all gloom and doom. Our municipal traders noted that many of the new deals were well received. A silver lining, perhaps? Over in the investment-grade corporate bond market, issuance was lower than expected. But here's the kicker - all deals were oversubscribed. Talk about high demand! As for the high yield bond market, our traders at T. Rowe Price noted that buyers of higher-quality securities remained active. It seems investors with cash on hand were on the hunt for values amid market weakness. Smart move, if you ask us.
In the world of fixed income, every cloud has a silver lining. The historic decline in bonds, while initially seeming like a setback, has actually made yields more attractive. This means they are now poised to generate higher returns. Here's the deal - the larger income component can better counterbalance price declines. So, if rates were to decline by 1%, this could potentially translate to a much larger upside in prices than the downside from an equivalent 1% rise in rates. In other words, the current situation could be a golden opportunity for savvy investors.
What does this mean for investors?
The S&P 500 is on the brink of reporting a year-over-year decline in earnings for the fourth consecutive quarter, with a projected drop of -0.2%. However, analysts believe we're at a turning point. This anticipated decline would be the smallest during this four-quarter streak, which could be a silver lining amidst the clouds. However, the earnings results might be overshadowed by the ongoing Middle East conflict and bond yields. Unless we see a significant surge in bond yields or an escalation of the conflict, the equity markets could be primed for a year-end rally. What do analysts recommend? Stay invested. They encourage investors to seize opportunities and consider adding quality investments at lower prices, while keeping expectations for returns and volatility realistic. A balanced and diversified approach could potentially help weather short-term market dips, which are almost inevitable in the long run. Remember, investing is a marathon, not a sprint. So, keep calm and carry on investing!
Analysts’ Stock Highlights
Let's take a look at some of the companies that had their stock prices move due to their quarterly earnings:
Amazon (AMZN) had a fantastic jump of 6.8% after reporting stronger-than-expected third-quarter results.
Capital One (COF) also had a good run, gaining 9.2% after the credit card issuer reported stronger-than-expected third-quarter results.
On the other hand, Charter Communications (CHTR) fell nearly 10% after the cable company reported better-than-expected earnings but also a loss of 320,000 video customers during the third quarter amid a carriage dispute with Disney.
Chevron (CVX) fell 6.7% after the oil company's quarterly earnings missed expectations.
Chipotle Mexican Grill (CMG) rose 4.5% after the restaurant chain's quarterly results exceeded expectations.
Dexcom (DXCM) rallied 10% after the medical device maker reported stronger-than-expected quarterly results and raised its full-year revenue forecast.
Deckers Outdoor (DECK) jumped 19% after reporting higher-than-expected earnings and a better-than-expected full-year forecast.
Exxon Mobil (XOM) shed 1.9% after the energy major's earnings came in slightly below forecasts.
Enphase Energy (ENPH) dropped nearly 15% after the solar energy company issued mixed results for the previous quarter and a disappointing outlook for the current quarter.
Ford Motor (F) tumbled 12.3% after the company's third-quarter results missed expectations. The automaker also dropped its previous full-year earnings forecast over the uncertain impact of the United Autoworkers strike.
Intel (INTC) surged 9.3% after the chipmaker's third-quarter numbers surpassed expectations and the company issued a strong outlook for the current quarter.
Stanley Black & Decker (SWK) gained 6.2% after the toolmaker reported third-quarter results that beat expectations.
Sanofi SA (SNY) plunged 19% after the France-based pharmaceutical company reported weaker-than-expected third-quarter earnings and said it expects higher research and development spending to curb profit in 2024.
Looking Ahead This Week
This week is set to be the busiest week of earnings season, with over 1,200 companies expected to report their earnings. McDonald's Corp. (MCD) is leading the parade today, while Dow member and industrial bellwether Caterpillar (CAT) will follow tomorrow, along with Advanced Micro Devices (AMD), Amgen (AMGN), Anheuser-Busch Inbev SA (BUD), BP p.l.c. (BP), and Pfizer, Inc. (PFE).
Earnings season was roughly 40% complete prior to Friday. About 78% of S&P 500 companies reporting so far have beat earnings forecasts, while just 47% have exceeded revenue estimates.
The share of profit beats is above recent averages, but the small share of revenue beats suggests companies are gaining less traction from price hikes. Additionally, consumers and businesses may be reducing purchases or choosing cheaper alternatives.
Also we've got a jam-packed week ahead of us, with a full calendar of top-tier data to keep an eye on. One of the key events will be the Fed's policy meeting scheduled for October 31 - November 1. Investors will be keenly watching for any policy changes or economic forecasts that could impact the markets.
But that's not all! The labor market will also be in the spotlight, with the October jobs report due on Friday. Before that, we'll get updates on private unemployment and the Job Openings and Labor Turnover Survey (JOLTS). These reports provide valuable insights into the health of the job market and can influence investment decisions.
We'll also be getting October PMIs for manufacturing and services from the Institute for Supply Management, along with finalized readings from S&P Global. These indicators help us gauge the economic activity in the manufacturing and service sectors, which are crucial components of the economy.
And there's more! We'll also see data on August home prices, September's construction spending and factory orders, October's consumer confidence and Chicago PMI, and measures of labor costs and productivity for the third quarter. These reports provide a comprehensive view of the economy's performance and can influence market trends.
So, buckle up, Gotraders! It's going to be a busy week. As always, we'll be here to keep you updated on all the important developments.
Source: EdwardJones, T.RowePrice, Charles Schwab, Julius Bär, Wells Fargo Investment Institute
https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html
https://www.schwab.com/learn/story/schwab-market-update
https://www.wellsfargoadvisors.com/research-analysis/commentary/looking-ahead/looking-ahead.pdf
