October continued the recent struggles of the overall market as the S&P 500 finished in the negative for the third month in a row, down by 2.1%. The S&P 500 is now down 8.25% over the previous 3 months. Small and mid caps continue to struggle in this high interest rate environment as both the S&P 600 (Small Cap Index) was down 5.74% in October and the S&P 400 (Mid Cap Index) was down 5.34%. Over the past 3 months the S&P 600 is down 15.06% and the S&P 400 is down 12.91%. Technology stocks were also hit in October as the tech-heavy Nasdaq was down 2.76% for the month. International stocks struggled equally as the MSCI EAFE Developed International index was down 4.04% for the month. Bonds were not immune either as higher interest rates continue to negatively impact bond prices as the Bloomberg US Aggregate Bond Index was down 1.58% in October.
When looking at the S&P from a sector perspective, Utilities was the only sector in positive territory, up 1.29%, after being the worst performing sector of the year coming into the month. Energy was the most negative sector in October returning -5.97%, followed by Consumer Discretionary (-4.47%) and Health Care (-3.21%). Even after the last 3 negative months, year-to-date, Communication Services remains positive by 37.87%, Information Technology by 34.69% and Consumer Discretionary by over 21%.
Higher interest rates continue to be the story and the main driver of markets in recent months and October was no exception. The shorter end of the yield curve has been relatively tame because of a continued pause in their rate hiking cycle by the Federal Reserve. Rising long-term rates continue to be the focus. We saw a 30 basis points increase in the 10-year treasury rate by the end of the month and saw the rate hover around and briefly hit 5% for the first time since 2007. There are growing concerns that longer term interest rates will remain higher for longer than previously expected. As previously mentioned, the Federal Reserve has been on a multi-year interest hiking cycle but there may also be a supply and demand imbalance that is also pushing rates higher. The government continues to spend more than it brings in and there are fewer large buyers of treasuries to fund these higher deficit levels. China and the Federal Reserve, two of the biggest players in the treasury market are not as active as they have been the last several years. Rising treasury rates mean an increased cost to service the debt. In addition to the normal spending, the government is also helping to fund at least two wars. Even if the Fed decides to cut short-term rates, long-term rates may not come down due to a large supply of treasuries with too few buyers.
It remains to be seen what kind of impact these higher rates will have on economic growth and the labor market. GDP surprised to the upside in the third quarter and came in at 4.9%, higher than expectations. The current GDPNow model, from the Federal Reserve Bank of Atlanta, estimates an economic growth rate of 2.3% for the final quarter of 2023. The unemployment rate remained at 3.8% for September and it will be interesting to see what the October number is reported to be as the market is watching for hints of softening in the labor market. The recent JOLTS report, which we have referenced in the past, was released on November 1st and the report showed a tick up in job openings while the ADP payroll report also released November 1st showed a lower-than-expected number of jobs added to the private sector. The ADP report also showed signs that wages are at their slowest pace of growth in 2 years.
We are part way through earnings season and current expectations are that earnings are expected to grow 3% for the quarter, which would be the first quarter of positive earnings growth since the 3rd quarter last year. A positive earnings season is just another sign of the economy’s resiliency through the higher interest rate environment. It remains to be seen if these positive earnings and a historically seasonally positive final two months of the year will lead to a rally in markets to finish the year or will the weight of higher rates be too much for the market to bear? In either scenario it is important to have a portfolio that meets your individual needs and that you are comfortable owning in either a positive or negative short term market scenario.
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