Economic Update 10-23-2023 

• Economic data for the week included the leading economic indicator index continuing to fall back. Housing data was mixed with existing sales down but starts up. On the positive side, retail sales and industrial production gained for the prior month. 
• Equities lost ground worldwide, due to uncertainty over the Israel/Gaza conflict, and interest rates continued to tick higher. Bonds struggled due to the same interest rate concerns. Commodities earned small gains in a variety of sectors. 

U.S. stocks fell back last week, pressured by Middle East geopolitical concerns, higher interest rates, and central bank comments that tilted hawkish. Earlier in the week, strong retail sales and industrial production weighed on markets as the ‘good news is bad news’ narrative took hold; then, Fed Chair Powell reiterated that inflation still remains ‘too high’ and the Fed should remain ‘cautious’ amidst strong economic growth. This added to the rising possibility of another policy rate hike—while not signaled for the next few weeks, the last meeting of the year remains a possibility. CME Fed funds futures for the Nov. 1 meeting still point to 99% odds of no change, while they’ve risen to over 30% for December. While several members have noted that we may be at ‘peak rates,’ others are less committal or even hawkish, adding to the uncertainty that markets dislike.  

The S&P 500 has fallen back towards the 200-day moving average, which is considered an important potential support point on the shorter-term technical side, assuming it holds. Small cap stocks are amazingly back near bear market territory, down almost -20% from highs in early 2022. By sector during the week, only energy and consumer staples experienced slight gains of under a percent each, while all others saw declines. Consumer discretionary led on the negative side, down over -4%. Real estate also fell back nearly -5% with interest rates again moving higher. 

S&P earnings for Q3 continue to trickle in. As measured by FactSet, 17% of companies have reported through Friday, so the season is quite early yet. Nearly three-quarters of those report an upside earnings surprise, and two-thirds show a positive revenue surprise. The blended (already-reported plus estimates) year-over-year earnings growth rate remains -0.4%. This weakness is due to revenue growth of just under 2%, as well as profit margins down a half-percent from the pace of a year ago, with cost-cutting largely done, and continued high wage costs. Overall results are expected to be led by communications and consumer discretionary, while energy and materials are still expected to lag. Most interestingly, results for Q4 and 2024 as a whole are expected to revert back to growth, with earnings growth for next year estimated to be a well-above-average 12%. 

Foreign stocks largely followed the same path as U.S. equities, held back by geopolitical concerns and related oil price worries, along with higher rates, with Europe faring slightly better than other regions and emerging markets. Earnings also appeared to come in a bit weaker than hoped. Chinese stocks led EM nations down, falling -4% on the week, as a major property developer announced further stress in paying back debt to offshore investors. 

Bond prices moved lower as interest rates again moved higher, after a bit of a reversal the prior week following the Israel-Gaza conflict. (Per history, conflicts have the tendency to create ‘risk-off’ environments.) All bond groups were down, with floating rate bank loans holding up best with minimal declines, in keeping with their less correlated nature. Foreign bonds also lost ground, with local currency emerging market debt faring a bit better as the U.S. dollar weakened. 

The 10-year U.S. Treasury touched the 5.00% yield level, in another milestone of ‘first time in X number of years’ (July 2007), resulting in a re-flattening of the yield curve. As with a variety of financial assets, round numbers tend to take on a stronger-than-normal technical importance, and can also represent support and resistance points. A key question has become: is a 5% level really justified by long-term growth and inflation expectations that tend to drive rates at that part of the yield curve? (Many economists think it isn’t.) At the same time, 5% represents a somewhat ‘normal’ anchor point, if one is looking at ranges of interest rates over the past few decades, demonstrated by the arbitrary past 40 years (9/30/1982-9/30/2023, starting just after the period of peak rates during the Volcker era) registering an average monthly yield 5.2% for the 10-year Treasury. This also happens to match the average yield since the end of World War II (Sept. 1945). Granted, these averages mask a good deal of volatility along the way, with monthly average rates falling within a band of 0.6% to 15.3% during that time, where inflation and economic growth were both higher and more variable. 

Commodities were up slightly on average across major groups last week, led by precious metals, which have ‘shined’ under geopolitical stress, as well as energy. Crude oil ticked up 2% last week to $88/barrel; natural gas prices fell -9% as inventories rose far higher than expectations and weather remained temperate on the East Coast. As in the prior week, the Middle East conflict has pushed crude prices higher, largely due to fears of wider regional involvement (such as Iran). In particular, the explosion at a Gaza hospital (where each side blamed the other) was the focus last week. Such a commodity market response has been the case for decades, although the world’s increasingly lower reliance on crude has muted this impact somewhat, compared to say, 1973. At the same time, the U.S. has been working with Venezuela to ramp up production, in another unique turn of diplomatic events. 

Period ending 10/20/2023	1 Week %	YTD %
DJIA	-1.57	1.67
S&P 500	-2.38	11.47
NASDAQ	-3.16	24.87
Russell 2000	-2.25	-3.40
MSCI-EAFE	-2.59	3.37
MSCI-EM	-2.70	-1.05
Bloomberg U.S. Aggregate	-1.73	-3.13

 

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
10/13/2023	5.62	5.04	4.65	4.63	4.78
10/20/2023	5.58	5.07	4.86	4.93	5.09

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.