October turned in a volatile month as the data center buildout story faltered. The trading activity revolved around forward guidance that was either reduced or failed to impress, despite excellent Q3 results for a multitude of companies. The NASDAQ index took the brunt of the selling, as Technology and Tech adjacent names retreated. Beneficiaries of the selling were value names in the Healthcare, Financial and Consumer Staples sectors. U.S. Treasuries continued to see buying activity.
S&P 500: Oct -1.20% Q3 +2.03% YTD +10.43%
DOW: Oct +1.52% Q3 -2.70% YTD +7.52%
NASDAQ: Oct -5.35% Q3 +2.47% YTD +9.39%
Russell 2000: Oct +0.12% Q3 -7.52% YTD +12.83%
Sector Performance YTD thru October:
Communication Services -11.85%
Consumer Discretionary -2.62%
Consumer Staples +15.94%
Energy +56.62%
Financials +3.10%
Healthcare +19.35%
Industrials +7.89%
Technology +19.13%
Materials +14.54%
Real Estate +7.85%
Utilities +1.69%
Current U.S. Treasury Yields:
6 Month Bill 4.22%
2 Year Note 4.56%
5 Year Note 4.67%
10 Year Note 4.87%
30 Year Note 5.25%
The Economy and the Fed:
Third quarter GDP came in at 3.4%, up from the 2.2% growth rate in the second quarter. Labor markets continue to show strength, while jobless claims remain low. Data shows that the labor force has expanded as the participation rate rose to 61.8%. The latest PPI and CPI reports were weak. ISM Manufacturing PMI printed 55.5%, beating the 54.6% expectations. We’ll get JOLTS on Tuesday, private payrolls Wednesday, Initial Jobless Claims Thursday and Nonfarm Payrolls on Friday. A busy week.
WTI crude remains elevated. The Iran conflict continues to weigh on markets. Unrest in Europe adds to the global worry. Ukraine and Russia have stepped up discussions but there is no imminent end to the war. The Mid-term election is tomorrow, perhaps changing the congressional balance and future policy decisions. This is adding to market volatility and anxiety.
Fed Chair Kevin Warsh left rates unchanged last week, as expected. Analysts expect a 25-basis points, and perhaps 50-basis points rate hike at the Fed’s December meeting. The inflation picture remains cloudy and above Fed target. Warsh is not showing the committee’s hand.
Looking Ahead:
There is no Technology bubble despite the recent damage to the sector. Uncertainty regarding the size and staying power of the AI story fueled the rotation out of the space. Capex concerns coupled with community pushback on water and electricity usage dented the trade. Value stocks and treasuries were rotated into and are a hedge to the AI Tech volatility.
Earnings have been, so far, excellent. What has dampened the market enthusiasm has been the forward guidance or only meeting expectations on growth and revenue and not surpassing. As well, the beats have been smaller this quarter. This week is another busy week of Q3 earnings reports.
The stocks that have been winning YTD have hidden the losers in the various indices. Roughly half of the companies in the S&P 500 are down YTD. The Magnificent Seven names have lagged in Q3, underperforming quite high expectations by almost 15%.
September and October have historically been tough months for investors. This year held to that truth. Part of the washout has also been tax selling as we head into year-end. We believe that the pullback was healthy, though unnerving, and has created opportunities for adding to portfolios new and to existing undersized equity positions. We remain long equities and expect positive market performance into year-end.
GN&Co