Early in October Israel was attacked by Hamas which reignited war in the middle east. Aside from the human tragedy that is always associated with War, this conflict adds to uncertainty and volatility for financial markets. Pairing these headwinds with the pressures associated by Russia’s invasion of Ukraine has only added to Global economic concerns. Additionally, the global economy continues to be battered by high inflation and restrictive monetary policies from the world’s largest central banks which adds pressures to global financial systems. Taken together, recent global and economic actions have kept investors on edge.
Geopolitical turmoil, lingering COVID-19 economic restrictions, supply chain bottlenecks, restrictive central bank policy actions, and inflation measures are topics that the Investment Management Group is monitoring.
The Federal Open Market Committee (FOMC) last met on November 1st and held their interest rate unchanged leaving their target range at 5.25%-5.50%. In a prepared statement by the Federal Reserve it was noted that: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” The statement concluded by providing guidance on what future decisions will be based on: “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” As of the end of October, market participants believe we have likely hit peak interest rates with prospective cuts coming around the middle of 2024.
The European Central Bank (ECB) last met on October 26th and held their interest rates unchanged. In their subsequent press release it was noted that “The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner.” The statement continued by stating “… the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal.” At the end of October, market participants believe that the Eurozone has likely hit peak interest rates with prospective cuts coming around the middle of 2024.
Global equities were lower in October. Domestically, Utilities was the only sector in the S&P 500 that posted positive returns with all other sectors retreating. Specifically, during October Consumer Discretionary and Energy fell by over 4%.
Third quarter Earnings season is well underway with just over half of the companies in the S&P 500 have reported as of the end of October. Year-to-date actual earnings in the S&P 500 have declined but have come in above market expectations. As of November 1st, over 60% of the S&P 500 reported 3rd quarter financial results. Earnings have been better than expectations and detailed growth compared to the previous quarter. This is an important shift as prior quarters this year have detailed actual earnings contractions.
The S&P 500 Index fell by 2.1% in October. The blue-chip Dow Jones Industrial Average fell by 1.3%. The tech heavy NASDAQ Composite fell by 2.8%. International stocks were also lower with the MSCI All Country World Index of developing and developed market stocks falling 3.0% in October. The MSCI Emerging Market Index fell by 3.9% in October. The MSCI EAFE Index of developed international equities fell by 4.1% in October.
On October 26th, third quarter U.S. GDP was reported, detailing quarter-over-quarter economic expansion of 4.9%, well above the prior quarters 2.1% and through market expectations of 4.5%. The strong report was supported by continued robust personal consumption metrics.
At September’s FOMC meeting the Fed released an update on their Summary of Economic Projections which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested improved projections on GDP and Unemployment for year-end 2023 paired with inflation estimates well above the Fed’s 2% target.
During the month of October term points in the U.S. Treasury curve moved mostly higher. At October month-end, the U.S. Treasury 2-year yield rose 4 basis point to 5.09% with the 10-year rising 36 basis points to 4.93%. The results of these changes netted a less inverted curve with the 2/10 inversion contracting to 16 basis points.
Mortgage Rates moved higher in October as the Freddie Mac 30-year Primary Mortgage Market Survey rose to 7.79% on October 26th up 48 basis points from September 28th.
On October 1st the U.S. Government avoided a shutdown by approving a last-minute 45-day temporary spending bill that will keep federal agencies open. The approved funding bill passed through the House of Representatives 335 to 91, with 90 Republicans rejecting the package and 1 Democrat. Following the temporary spending bill’s approval on October 1st, Kevin McCarthy was voted out as speaker of the House on October 3rd. After weeks of deliberation, on October 25th Mike Johnson of Louisiana won the Speakership of the House of Representatives with unanimous Republican support.
The September CPI report detailed year-over-year inflation at 3.7%, above target levels and above the previous month’s 3.6%. The third quarter U.S. GDP report detailed an expanding US economy with a robust 4.9% growth rate, above market expectations. Finally, the most recent Summary of Economic Projections detailed improved expectations on year-end U.S. GDP with expected inflation measures well above the U.S. Central Banks target 2%
Recent stresses on the global financial system, persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a slower than initially expected pace.