Economic Update 10-11-2023 

• Economic data for the week included ISM manufacturing staying in contraction, but continuing to improve, while ISM services slowed a bit, but continued to expand at a rapid clip. The employment situation report surprised to the upside, as did job openings earlier in the week. 
• Global equities were mixed, with net gains in U.S. large cap, while small cap and international stocks declined. Bonds also fell back again due to interest rates inching higher. Commodities declined as crude oil prices pulled back sharply. 

U.S. stocks ended positively, despite starting weaker, due to Fed comments continued to allude to ‘higher for longer,’ in respect to policy interest rates. This was in addition to decent economic data earlier in the week, such as the ISM reports and JOLTs. Rep. McCarthy was removed as Speaker of the House, which doesn’t bring any immediate impacts, but alludes to the trickle-down effect of rising chances for a government shutdown in mid-November when the temporary stopgap bill runs out. To end the week, Friday’s surprisingly strong employment situation report reversed prices back into the negative before recovering. This represented more ‘good news is bad news’ in the vein that a continued strong labor market provides the Fed with even more cover for their higher-for-longer narrative. Going into the new week, conflict in Israel over the weekend is expected to add to near-term volatility, as oil prices have often been affected by instability in that region. 

By sector, growth stocks saw a bounceback, led by 3% gains in technology and communications; this offset -3% declines in energy and defensives consumer staples and utilities, as well as declines in U.S. small cap. Real estate also declined over a percent along with still-higher interest rates. 

Foreign stocks ended in the negative, with developed and emerging markets similar on net, on the heels of widespread fears of global interest rates staying higher for longer. Europe fared a bit better than Japan, with mixed but slightly better economic data, while in EM, Brazil and Mexico underperformed due to a higher exposure to commodities. Chinese markets were closed for autumn holiday last week. 

Bonds declined across the board as interest rates ticked higher again, with government and corporate credit down by a similar magnitude. Senior floating rate loans performed slightly better. Foreign bonds in developed markets were in line with U.S. markets, while emerging markets sold off by several percent. Bonds have continued to experience volatility in recent weeks, as long-term interest rates rose to meet ‘higher for longer’ expectations brought on by recent Federal Reserve comments. This doesn’t refer so much to many, if any, additional rate hikes, but a lack of interest in ultimately cutting rates in 2024. This has led to a ‘bear steepening,’ which refers to the steady un-inversion of the yield curve via the long-end rising as opposed to the short-end falling, which is less common. Interestingly, unwinds of yield curve inversions have tended to occur closely before recessions begin, at least in recent decades, with curves during recessions turning positive as expectations for the future improve. Many investors find this relationship surprising. 

Commodities were largely down last week, driven by energy and industrial metals. Crude oil prices fell by -9% last week to under $83/barrel, due to reports of expected demand slowing in 2024 along with a strong rebuild in U.S. gasoline inventories. Natural gas prices have begun to slowly rise again in anticipation of winter heating needs following a sharp price downturn so far this year. Gold prices have fallen off as of late, which has surprised some due to their tendency to fare better when stocks weaken, but this appears largely due to a rise in treasury real yields—their main competition for ‘risk-off’ asset flows. 

Period ending 10/6/2023	1 Week %	YTD %
DJIA	-0.24	2.48
S&P 500	0.52	13.66
NASDAQ	1.62	29.17
Russell 2000	-2.19	0.29
MSCI-EAFE	-1.85	5.10
MSCI-EM	-1.61	0.18
Bloomberg U.S. Aggregate	-1.17	-2.36

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
9/29/2023	5.55	5.03	4.60	4.59	4.73
10/6/2023	5.63	5.08	4.75	4.78	4.95

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.