October Recap and November Outlook
In the Federal Reserve's November meeting, they decided to keep interest rates steady, which was what everyone was expecting. However, the real surprise came with the bond market's wild fluctuations in October and early November. It's like steering a ship through a fierce storm – intense, demanding strategic navigation, and where every move can change the course. Staying steady isn't just a goal; it's a necessity for navigating these unpredictable financial waters.
During October, the interest rate for the ten-year U.S. government bond briefly shot up over 5%. This was a big deal because it was the highest it's been since July 2007. Investors were likely reacting to the belief that the Federal Reserve would maintain higher interest rates for a longer period due to a strong economy and persistent high inflation.
Then, there was a twist. The U.S. government announced a reduction in its borrowing plans, and Federal Reserve Chairman Powell confirmed that interest rates would stay put. This news helped to settle the bond market as we entered November.
What is the Data Saying?
In the third quarter, the economy exhibited notable growth with a 4.9% increase in GDP, signaling robust economic activity. However, the job market showed signs of slowing down, as evidenced by the addition of only 150,000 jobs in October, marking a decrease from previous months. Despite this, consumer spending maintained an upward trajectory, with a significant rise in September. Additionally, labor productivity experienced a considerable surge, recording a 4.7% increase during the same quarter, reflecting increased efficiency in the workforce.
So, what does all this data mean? The Federal Reserve makes decisions based on these economic indicators, and the market reacts accordingly. For many of us, it can be quite a challenge to keep up with these changes. Despite the robust economic growth, the Fed chose not to alter interest rates. They also hinted at monitoring the borrowing conditions for individuals and businesses, suggesting that the previous rate hikes were starting to impact the economy.
Powell made it clear that cutting rates isn't on the table right now. He seems to be cautioning against any assumptions that the current monetary policy stance is set to change soon. The Fed's recent decisions shouldn't be seen as a sign that it will be difficult for them to raise rates in their December meeting.
A cooling job market is generally positive, but an increase in unemployment brings its own risks, like the potential for a recession. The unemployment rate has risen from 3.4% in April to 3.9% in October. According to the Sahm Rule, which is a way to predict recessions, there are some warning signs on the horizon.
In the stock market, October was a tough month. The S&P 500, Dow Jones, and smaller company indices all saw declines. The bond market also experienced volatility, with the 10-year U.S. Treasury yield ending the month at a notably high 4.92%.
For investors, this market turbulence suggests it might be a good time to review and possibly adjust your investments. This process, known as rebalancing, can help align your portfolio with your risk tolerance. With the holiday season approaching, having a financial plan in place can offer peace of mind.
Chart of the Month: GDP “Advance” Estimate Beats High Expectations
The economy showed significant growth in the third quarter. The initial estimate for GDP came in at 4.9%, beating expectations of 4.3% – the fastest pace in nearly two years..
Source: U.S. Bureau of Economic Analysis. Seasonally adjusted annual return rates.
Equity Markets in October
The S&P 500 was down 2.20%
The Dow Jones Industrial Average fell 1.36%
The S&P Mid Cap 400 declined 5.42%%
The S&P Small Cap 600 was down 5.83%
Source: S&P Global. All performance as of October 31, 2023
October marked the third consecutive month of declines for the S&P 500, which nearly entered a correction phase with a more than 10% decline over the three-month period from August to October. However, a slight recovery in the last two days of October reduced the three-month loss to -8.61%. Across the board, all eleven market sectors saw declines in October, with Utilities experiencing the smallest decrease at -0.43% and Industrials being the worst-performing sector at -5.09%. Despite 77.5% of companies surpassing earnings estimates, the outlook for future performance was not as optimistic as anticipated.
Bond Markets
The bond market also witnessed notable changes in October. The yield on the 10-year U.S. Treasury bond increased to 4.92% by the end of the month, up from 4.58% at the start of the month and even reaching 5.02% at one point. This was the first time in 16 years that the 10-year Treasury yield exceeded 5%. The 30-year U.S. Treasury bond closed the month with a yield of 5.08%. In terms of broader bond market performance, the Bloomberg U.S. Aggregate Bond Index reported a return of -1.58% for the month, contributing to a year-to-date return of -3.11%.
The Smart Investor
A new cycle means that it’s a good time to review your balance sheet, your financial goals, and your portfolio. There are a lot of actions you can take to ensure that you remain on track. Are you comfortable with the level of risk you are taking in your portfolio? With the market swinging around, you may want to trim risk, but it’s a better idea to do it thoughtfully.
Good housekeeping chores include:
Rebalance and Diversify: Ensure your portfolio is diversified across various sectors and asset classes to mitigate risks, especially considering the current economic shifts.
Tax-Loss Harvesting: Identify underperforming assets to sell and offset gains, thereby minimizing tax liability while maintaining a strategic investment approach.
Strategic Debt Management: Prioritize reducing high-interest debts and cautiously manage new debts, especially in a potentially rising interest rate environment.
Maximize Retirement Contributions: Ensure you are contributing maximally to retirement accounts and consider any adjustments to align with current market conditions and future financial goals.
In the face of ongoing market volatility, being prepared with a well-thought-out strategy is essential to navigate potential challenges confidently.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
Alchemist Wealth, LLC is registered as an Investment Adviser with the State of Ohio and only provides advisory services in states where registered or otherwise exempt from registration. All information provided herein is for educational and informational purposes only and should not be viewed as investment advice. Any links to third party information or data are believed to contain accurate information at the time of publishing.
