Weak Second Half of the Month Sends Stocks Lower; Bonds Struggle with Rates Moving Higher
HIGHLIGHTS:
- Stocks started the month strongly with the three major U.S. equity indices putting in new all-time highs – a bit of a broken record here. However, stocks paused later in the month, which ultimately led to declines for October.
- After a five-month winning streak, bonds fell rather sharply in October and yields surged higher. Year to date returns remained positive for most bond sectors, but October put a dent in those results. The 10-year U.S. Treasury yield ended September at 3.81% but rose to close October at 4.28%. The last 4%+ yield for the 10-year U.S. Treasury prior to October was seen in late July.
- The U.S. economy continued to grow with some signs of slowing, but also showed some signs of resiliency. The ISM Manufacturing Index remained below 50 in September, but the Non-Manufacturing Index rose more than expected to 54.9. Job market activity has slowed recently, but September data showed strength with over 100,000 more jobs added than expected and the unemployment rate dropping to 4.1%.
- October was the last month of 2024 without an FOMC meeting, and the market is still anticipating additional cuts at the final two meetings of 2024. With recent strength in economic data, the expected pace of rate cuts has slowed modestly with the expected Fed Funds target between 3.50%-3.75% by December 2025. (Per the CME FedWatch tool as of 10/31/24.)
EQUITY MARKETS
After the major U.S. equity indices posted new all-time highs early in the month, stocks slid lower to close out October in negative territory. Large-cap growth held up the best in what was a challenging month. See Table 1 for equity results for October 2024, year to date, and calendar year 2023.
Table 1
| Index | Oct-24 | YTD | 2023 |
| S&P 500 | -0.91% | 20.97% | 26.29% |
| S&P 500 Equal Weight | -1.63% | 13.29% | 13.87% |
| DJIA | -1.26% | 12.50% | 16.18% |
| Russell 3000 | -0.73% | 19.75% | 25.96% |
| NASDAQ Comp. | -0.49% | 21.24% | 44.64% |
| Russell 2000 | -1.44% | 9.56% | 16.93% |
| MSCI ACWI ex U.S. | -4.91% | 8.61% | 15.62% |
| MSCI Emerging Mkts Net | -4.45% | 11.66% | 9.83% |
The recent broadening of the stock market that occurred in the third quarter paused as large-cap growth had better relative results in October, but those results were still negative. After such a strong run in stocks, seeing a modest pause in gains is not unexpected and year-to-date results are still very strong.
Emerging markets had some of the best monthly results in September, advancing over 6.6%, but posted some of the worst monthly results in October, ending down almost 4.5%. International stocks in general struggled as well in October as the MSCI ACWI ex US lost nearly 5%, which pushed year-to-date returns back to single digits. Small-caps, despite some impressive returns in the third quarter, dropped in October and they too fell back to single-digit returns year to date.
Despite weakness in October, stocks have enjoyed solid gains in 2024 led by large-caps and growth, but with broad participation in U.S. equities. International stocks have lagged the U.S., repeating a pattern of recent years.
Fixed Income
After hitting the highest level of the year in April, the 10-year U.S. Treasury yield declined for five months setting up a better backdrop for bonds. However, in October, the 10-year yield rose to its highest level since the summer. The 10-year U.S. Treasury yield ended September at 3.81%, but rose to close October at 4.28%. This sharp rise in yields put pressure on bond prices during the month and returns struggled. Once again, the area that stood out was high-yield bonds, which only fell marginally as they are less interest rate sensitive compared to other areas of the bond market. See Table 2 for fixed income index returns for October 2024, year to date, and calendar year 2023.
Table 2
| Index | Oct 2024 | YTD | 2023 |
|---|---|---|---|
| Bloomberg U.S. Agg | -2.48% | 1.86% | 5.53% |
| Bloomberg U.S. Credit | -2.41% | 2.69% | 8.18% |
| Bloomberg U.S. High Yld | -0.54% | 7.42% | 13.44% |
| Bloomberg Muni | -1.46% | 0.81% | 6.40% |
| Bloomberg 30-year U.S. TSY | -5.42% | -4.07% | 1.93% |
| Bloomberg U.S. TSY | -2.38% | 1.36% | 4.05% |
Declines in October had a significant impact on the overall year-to-date results for most bond sectors. The more rate sensitive sectors (like 30-year U.S. Treasuries) were hit hardest by this jump in rates. High yield bonds have had a steadier run this year as they often follow what is happening with stocks, and they have been the leaders in 2024 for the bond market.
At the start of the year, we said we thought the 10-year U.S. Treasury yield would be in a range between 3.25% and 4.5% in 2024 (acknowledging that we got above that level in April). The trend in rates was lower since those April highs but that reversed in October. We believe Fed rate cuts will impact the front end of the yield curve more dramatically, but that the general trend will be for rates to move lower. We continue to anticipate elevated volatility in bonds as we move through the election and the market adjusts to the pace of the Fed rate cut cycle as it develops.
We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment and that has served us well so far in 2024. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. Furthermore, we believe that bond yields remain attractive, and we believe we are seeing some of the best bond yields in years. The move higher in rates in October only adds to that thinking. In our opinion, having an active bond management approach makes sense in these volatile times.
Economic Data Highlights and Outlook
The soft-landing scenario seems to be developing in the U.S. economy, but recent strength in economic data has had some prognosticators calling for “no-landing.” Data released in October (largely covering September), continued to point to a growing economy. The first or advanced reading of Q3 2024 GDP came in at 2.8% annualized growth, slightly below expectations of 2.9%, but the personal consumption component surpassed expectations reflecting ongoing spending by U.S. consumers.
The Atlanta Fed GDPNow estimate for economic growth (as of October 31) shows the economy running at an estimated 2.7% annualized growth rate for the fourth quarter. The U.S. economy seems to be running somewhat ahead of our expectation of 2.25% growth for all of 2024.
Job market data was strong for September. Non-farm payrolls grew by 254,000 in September, easily surpassing estimates of 150,000. The unemployment rate unexpectedly fell to 4.1% as well, when it was supposed to remain at 4.2%. (Job additions were weak in October but much of that weakness was attributed to the strike at Boeing and the recent hurricanes. The unemployment rate stayed at 4.1%.) Generally, we have seen some moderation in the job market, which is not unexpected following a rate-tightening cycle, but September reflected some resiliency in the job market as well.
Job openings data has been volatile the last two months. Job openings surged back above 8 million in August, which was well above expectations of just under 7.7 million and the prior reading of just over 7.7 million. However, those openings fell to 7.443 million in September, which was below the 8 million expected and the prior month reading was revised down to 7.861 million. The trend in job openings continues to move lower, but with some volatility. Chart 1 shows the number of unemployed people in the U.S. compared to job openings and how this gap has narrowed over the last couple of years, but openings still outnumber the unemployed.
Chart 1
Labor markets are normalizing and as a result, tighter labor market conditions exist. With the Fed’s dual mandate consisting of price stability and full employment, the weaker job market supports the Fed beginning to cut rates. Overall, we would still view the job market as healthy and coming more into balance. It seems unlikely that the economy would slow too drastically with the current position of the labor market. We continue to expect that the economy will slow, but that it will still grow in 2024 and into 2025 resulting in a “soft landing.” Even if a recession developed, we believe it would be mild due to the strength of the consumer. We believe opportunities exist in the stock and bond markets under either a slow growth or mild recession scenario, but we believe the odds currently favor a soft landing.
The other side of the Fed’s dual mandate, price stability, has improved but the September data was a bit mixed. The Consumer Price Index (CPI) rose by 0.2% in September, modestly higher than the 0.1% expectation and the year-over-year CPI was at 2.4%. This was an improvement (lower) from last month but was 0.1% above expectations. The core CPI reading was modestly higher for the month compared to expectations (0.3% vs.0.2% expected), and the annual increase at 3.3% was 0.1% higher than expectations and the prior month.
The headline Producer Price Index (PPI) was flat for the month, better than the expected 0.1% increase. The core PPI was in-line with expectations for the month. However, the year-over-year increases for headline and core PPI at 1.8% and 2.8%, respectively, were both 0.2% higher than expectations and prior month readings were revised higher as well. Rounding out the inflation readings for August, the preferred inflation measure of the Fed, the Personal Consumption Expenditures (PCE) Price Index largely matched expectations. The headline PCE Index had an annual increase of 2.1% in September after a monthly increase of 0.2% – both matched expectations. The core PCE reading (the reading the Fed targets) was modestly higher than expected at 2.7% compared to estimates of 2.6%, but the monthly increase of 0.3% was as expected.
We do not expect inflation numbers (or other economic data for that matter) to move in just one direction and some volatility along the way is usual. We still contend inflation continues to improve and move lower overall. Chart 2 shows the headline and core PCE Price Indices continuing to trend lower.
Chart 2
For illustrative purposes only. For illustrative purposes only. Past performance is not indicative of future results.With inflation improving and the job market showing some recent weakening, the Fed took action and cut the Fed Funds Target Rate by 50 basis points in September. This was the first rate cut by the Fed since the pandemic in 2020. As stronger economic data came in during October, the market began to price in a modestly slower rate cutting cycle.
Per the CME FedWatch tool (as of 10/31/24), the market is pricing in a 69.8% chance that the Fed will cut rates twice before the end of the year and by December 2025, the odds favor the Fed Funds Rate to be in the range of 3.5%-3.75%, indicating 5 cuts from now through the end of 2025. While subject to change, this data point gives us an indication of how the market is looking at, and pricing in, Fed rate cuts over the next year or so.
As interest rates have been volatile, so have mortgage rates, and the housing market reflects a mixed environment as well. Housing starts were ahead of expectations in September, but building permits fell short of estimates and both declined from August levels. Existing home sales declined from August and were lower than expected, but new home sales surpassed expectations and improved from last month. The S&P CoreLogic 20-City Index of home prices rose by 5.20% for the year through August, ahead of expectations of 5.10% but below the prior month’s annual increase of 5.93%.
With rates moving up sharply in October, it would not be a surprise if this took some wind out of the sails of the housing market over the last month. Mortgage rates tend to follow what is happening with the 10-year U.S. Treasury so that has likely been a recent headwind to the overall housing market. We will have to monitor data released in November to see how housing has reacted to higher recent rates. Chart 3 shows a measure of 10-year U.S. Treasury yields and the 30-year average fixed rate mortgage.
Chart 3
For illustrative purposes only. For illustrative purposes only. Past performance is not indicative of future results.The ISM indices were mixed in September. The ISM Manufacturing Index stayed the same at 47.2 compared to the prior month, when it was expected to improve modestly to 47.5. (It disappointed once again in October with a reading of 46.5 compared to expectations of 47.6.) Manufacturing continues to clearly be in contraction mode. The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, had a solid bounce back in September to 54.9. Expectations were calling for a modest improvement to 51.7 from the August level of 51.5, so the reading easily surpassed those data points. Recall for the ISM Indices that readings above 50 indicate expansion and those below 50 signal contraction.
Retail sales (ex. auto and gas) had a 0.7% monthly gain in September and were well ahead of expectations of 0.3% growth, once again indicating that consumers are still spending. The preliminary University of Michigan Sentiment reading for October dropped modestly to 68.9 compared to the prior reading of 70.1 and was below expectations of 71.0. The Conference Board’s Leading Index has now declined for 7 straight months. For September, it fell -0.5%, which was more than the -0.3% expectation. Clearly, the Leading Economic Indicators Index has not been a good predictor of the way the U.S. economy has acted as the economy has continued to grow over the last couple of years.
Equity markets continued to make strides during the first part of October reaching new all-time highs, but that gave way to some weakness to close out the month. (Exacerbated by a rather strong sell-off on Halloween.) Interest rates rose steadily throughout the month as economic data was rather strong, resulting in a potentially slower rate cut cycle than some had initially thought.
Overall, for the first time in several months, October was a challenging period for both stocks and bonds. Volatility, as measured by the VIX Index, reflected increased anxiety as we headed toward the election closing the month above 23 – the highest closing level since early August, but not too surprising with the strength stocks have enjoyed this year and an election looming.
We maintain our belief that the economy will grow in 2024, but likely at a more muted pace than last year and that seems to be developing. The good news is that currently, earning expectations for 2024 and 2025 are for double-digit growth, but that is obviously subject to revision. Over the long run, we believe company earnings drive stock prices, so we like that fundamental backdrop with earnings expected to grow and an economy expected to grow as well. We noted and acknowledged last month that, “October started with an escalation of the crisis in the Middle East, and we are also entering the final countdown to our U.S. election,” which could “spur volatility.” That is indeed what we have seen. However, we believe the economic and market fundamentals remain solid. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
Investment Implications
Clark Capital’s Top-Down, Quantitative Strategies
Our primary credit risk management models have remained bullish on the markets and risk-on since 11/6/2023. As a result, our Fixed income Total Return strategy has remained invested in high yield and our Global Tactical strategy has remained invested in global equity. From 11/6/23 to 10/31/24, just shy of one year, the S&P 500 advanced 32.5%, the Russell 2000 Index advanced 28.2%, the MSCI ACWI ex-US Index advanced 18.2%, the Bloomberg US Corporate High Yield Index advanced 13.7%, and the Bloomberg 7-10 Year Treasury Index is up 7.2%. It has been a good period to remain fully invested as our models have done so.
Clark Capital’s Bottom-Up, Fundamental Strategies
The first rate cut of the new monetary easing cycle occurred on September 18th, and since then the economy has performed well and contrary to normal behavior, yields have risen reflecting concerns regarding the federal debt and deficit, and concerns that inflation will edge higher. The 10-year U.S. Treasury yield climbed from a low of 3.6% on 9/16 to 4.28%, a rise of 68 basis points in just a month and a half. The Fed is expected to cut interest rates by another 0.25% at their FOMC meeting on 11/7, just two days after the Presidential Election.
ECONOMIC DATA
| Event | Period | Estimate | Actual | Prior | Revised |
| ISM Manufacturing | Sept | 47.5 | 47.2 | 47.2 | — |
| ISM Services Index | Sept | 51.7 | 54.9 | 51.5 | — |
| Change in Nonfarm Payrolls | Sept | 150k | 254k | 142k | 159k |
| Unemployment Rate | Sept | 4.20% | 4.10% | 4.20% | — |
| Average Hourly Earnings YoY | Sept | 3.80% | 4.00% | 3.80% | 3.90% |
| JOLTS Job Openings | Sept | 8000k | 7443k | 8040k | 7861k |
| PPI Final Demand MoM | Sept | 0.10% | 0.00% | 0.20% | — |
| PPI Final Demand YoY | Sept | 1.60% | 1.80% | 1.70% | 1.90% |
| PPI Ex Food and Energy MoM | Sept | 0.20% | 0.20% | 0.30% | — |
| PPI Ex Food and Energy YoY | Sept | 2.60% | 2.80% | 2.40% | 2.60% |
| CPI MoM | Sept | 0.10% | 0.20% | 0.20% | — |
| CPI YoY | Sept | 2.30% | 2.40% | 2.50% | — |
| CPI Ex Food and Energy MoM | Sept | 0.20% | 0.30% | 0.30% | — |
| CPI Ex Food and Energy YoY | Sept | 3.20% | 3.30% | 3.20% | — |
| Retail Sales Ex Auto and Gas | Sept | 0.30% | 0.70% | 0.20% | 0.30% |
| Industrial Production MoM | Sept | -0.20% | -0.30% | 0.80% | 0.30% |
| Building Permits | Sept | 1460k | 1428k | 1475k | 1470k |
| Housing Starts | Sept | 1350k | 1354k | 1356k | 1361k |
| New Home Sales | Sept | 720k | 738k | 716k | 709k |
| Existing Home Sales | Sept | 3.88m | 3.84m | 3.86m | 3.88m |
| Leading Index | Sept | -0.30% | -0.50% | -0.20% | -0.30% |
| Durable Goods Orders | Sept P | -1.00% | -0.80% | 0.00% | -0.80% |
| GDP Annualized QoQ | 3Q A | 2.90% | 2.80% | 3.00% | — |
| U. of Mich. Sentiment | Oct P | 71 | 68.9 | 70.1 | — |
| Personal Income | Sept | 0.30% | 0.30% | 0.20% | — |
| Personal Spending | Sept | 0.40% | 0.50% | 0.20% | 0.30% |
| S&P CoreLogic CS 20-City YoY NSA | Aug | 5.10% | 5.20% | 5.92% | 5.93% |
Source: Bloomberg: A-Advance, P=Preliminary
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