What happened in the markets - 30 Oct - 3 Nov 2023
Introduction
Stocks bounced back this week with the belief that rates have hit their peak. This came after the Federal Open Market Committee (FOMC) kept rates the same and labor market data showed a slowdown. The Federal Reserve Chair, Jerome Powell, didn't rule out another hike. However, he did mention that the recent increase in long-term rates lessened the need for a rate increase. Updates on consumer sentiment, consumer credit, and wholesale trade are expected next week. Investors will listen closely to Fed speakers to gain insight into upcoming monetary policy. Also, the third-quarter earnings season is set to show a year-over-year earnings increase, with more than 80% of S&P 500 Index companies having reported. Earnings have exceeded expectations, but forward guidance has been disappointing.
Key Takeaways
Stocks significantly increased last week due to economic data and comments from the Fed leading to a drop in interest rates.
Financial markets continue to be driven by monetary policy. As anticipated, the Fed kept rates unchanged in its last meeting. However, it adopted a more balanced stance regarding future rate decisions. Analysts believe this indicates the Fed's rate-hiking cycle could be over.
The recent employment report boosted the belief that the Fed can take a back seat. It showed that the labor market conditions have become calm enough to assist the decline in inflation. Moreover, it remains robust enough to back the consumer and prevent a harsher recession.
Analysts predict challenges ahead, but they also see potential for market momentum. This optimism comes from recent market corrections, positive economic forecasts, the possibility of the Fed maintaining current policies, and a seasonally strong period for stocks. They believe these factors create a strong argument for market growth as we transition from 2023 to 2024.
Stocks see best gain since November 2022 on falling yields
The S&P 500 Index saw its biggest weekly boost in nearly a year. This was due to signs of economic slowdown and a Federal Reserve policy statement, which was seen as dovish, leading to a significant drop in long-term bond yields. Growth stocks and the Nasdaq Composite Index slightly outperformed others. However, the gains were wide-ranging, with the small-cap Russell 2000 Index realizing its best weekly gain since October 2022.
The second-busiest week of the earnings season also saw institutional investors making trades to recognize tax losses before the end of their fiscal year on October 31. Index rebalancing and "window dressing" before month-end holdings disclosure may also have contributed.
The week was heavy with policy statements, economic reports, and geopolitical developments. The Fed's policy meeting, which concluded on Wednesday, was a key sentiment driver. Although the Fed kept rates steady—as expected—investors were buoyed by the post-meeting statement. It suggested that the recent surge in long-term Treasury yields had achieved some of the intended tightening in financial conditions. Fed officials also seemed at ease with the recent unexpected improvements in economic data, slightly adjusting their description of economic growth pace from "solid" to "strong."
What's the recipe for a rally?
Stocks have been struggling for the majority of the last two months due to rising rates souring the market's mood. The downturn last week didn't come as a shock, as we've highlighted in our previous Weekly Market Wraps that the rise in rates was more likely temporary, and a reduction in 10-year yields would stabilize the stock market.
The overall market sentiment seemed to be lifted by the U.S. Treasury’s announcement of selling slightly less longer-term securities than initially projected. This move appeared to ease the bond market's pressure, as there have been growing concerns about the demand for Treasuries not keeping pace with the growing supply needed to finance the increasing federal debt.
These factors led to a significant drop in long-term Treasury yields over the week. The yield on the 10-year U.S. Treasury note fell to its lowest level since late September. The fall in Treasury yields positively impacted the municipal bond market, which also benefited from comparatively low primary issuance.
Credit-sensitive bond sectors also did well, particularly after the Fed’s announcement on Wednesday. The investment-grade corporate market saw significant issuance met with strong demand. The high yield bond market also benefited from a lack of new issues and the upgrade of Ford debt to investment grade.
Unemployment rate reaches highest level since early 2022
The recent payrolls report on Friday indicated a potential slowdown in the labor market, as job growth and wage pressures might be on the decline. In October, employers added 150,000 jobs, which is below the expected number and is the lowest since June. In addition, the previous month's job growth was adjusted downwards. The unemployment rate increased to 3.9%, marking the highest since January 2022.
Average hourly earnings increased by 0.2%, which is less than what was anticipated. However, the rise in September was adjusted to 0.3%. The yearly gain dropped to 4.1%, the lowest in over two years, but it's still above the roughly 3% rate that policymakers believe is in line with their 2% inflation target. The Labor Department's quarterly employment cost index, published on Monday, indicated a yearly increase in wages and benefits of 4.3%.
On a positive note for both employees and investors, early estimates of productivity growth for the quarter exceeded expectations, with labor costs decreasing. The 4.7% increase in productivity is the highest since businesses started reopening in the initial phase of the pandemic in the third quarter of 2020.
Conclusion
Seasonal Trends. Analysts don't aim to forecast short-term market shifts, but they believe the recent drop in stocks and spike in interest rates have created a favourable opportunity in both equities and bonds. Historically, stocks have seen strong returns in November and December. Since 1980, the stock market has risen in the final two months of the year 79% of the time.
Making Informed Decisions During Corrections. There's no certainty that the 10% drop in October marked the end of the equity market's weak period, but we believe it shifted the risk-reward balance in favour of investors. Past corrections have seen an average 14% fall, followed by an average two-month increase of 10% and a one-year return of 28%. This underscores the potential opportunities short-term declines can offer and the need for strategic, long-term decision making during periods of market turbulence.
Analysts’ Stock Highlights
The following companies experienced stock price changes due to quarterly earnings, analyst ratings, or other news:
Apple (AAPL) saw a 0.5% drop after announcing its fourth consecutive quarterly sales decrease and giving a subdued forecast for the current quarter.
Bill Holdings (BILL) plummeted 25% after the software company lowered its earnings and revenue forecast for the full year, overshadowing stronger than anticipated results from the previous quarter.
Block (SQ) increased by 11.2% after the financial technology company reported better-than-expected quarterly results.
Carvana (CVNA) rose 7.9% after the used car retailer announced an unexpected profit for the last quarter.
DraftKings (DKNG) surged 16% after the sports gambling company's third-quarter revenue exceeded expectations.
Expedia Group (EXPE) soared 19% after the travel-booking platform's earnings surpassed expectations.
Fortinet (FTNT) fell 12% after the cybersecurity company's earnings failed to meet forecasts.
Live Nation Entertainment (LYV) rose 3.5% after the ticket seller's quarterly results surpassed expectations.
Paramount Global (PARA) increased over 15% after the media company exceeded earnings and revenue estimates for the previous quarter.
Heading to Upcoming Week
Key events this week include a preliminary November consumer sentiment and inflation expectations report from the University of Michigan on Friday. Other data includes September's trade balance, consumer credit, and wholesale trade, as well as October's Treasury budget statement. Fed Chair Jerome Powell will speak at the IMF's annual research conference and the Fed will publish the November Senior Loan Officer Opinion Survey. The Treasury Department plans to auction off $112 billion of three-, 10-, and 30-year securities.
This week is also peak earnings season, with over 1,500 companies set to report, says Nasdaq. Companies releasing earnings next week include Gilead Sciences and Uber Technologies on Tuesday, Honda Motor Co. and Walt Disney Co. on Wednesday, and Astrazeneca PLC on Thursday.
Curated by: Setiawan, T. H.
Source: EdwardJones, Wells Fargo Investment Institute, T.RowePrice, Charles Schwab
https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
https://www.wellsfargoadvisors.com/research-analysis/commentary/looking-ahead/looking-ahead.pdf
https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html
