Watch the CPK Market Action Report: October 2023
Equity markets fall again in September as bond yields, oil and the dollar surge even higher. Can the markets repeat previous fourth quarter performance preceding an election year or with the headwinds prove too much to handle?
Watch the Market Action Report now:
Market Action Report
October 2023
INTRO TAG
Equity markets fall again in September as bond yields, oil and the dollar surge even higher. Can the markets repeat previous fourth quarter performance preceding an election year or with the headwinds prove too much to handle?
That action starts now!
INDEX PERFORMANCE RECAP
The pressure was on, and nothing was going to turn around equity performance this month. The Dow Jones Industrials closed lower, losing 3.92% and while the S&P 500 was down 5.35%. The real loser for the month was the Nasdaq Composite dropping a whopping 6.44%.
EQUITY UPDATE
Just like last month, movement in the equity markets was inversely tied to the yield of the 10yr Treasury. As rates go up, equity prices fall and that is just what happened this month. As a matter of fact, more than 50% of the stocks in the S&P 500 have now turned negative for the year.
The market is still embracing the idea that the Fed is done with rate hikes, which is debatable. However, many analysts and investors were banking on the Fed lowering rates about now and that is not going to happen. Even if the Fed is done hiking for now, higher rates aren’t going anywhere for the foreseeable future which will require consumers and markets alike to adjust to the new normal.
BOND UPDATE
Bond yields continued their rally throughout the month, forcing additional selling in equities. The 5yr settled at 4.60%, the 10yr at 4.57% and the 30yr 4.71%. As I write this, the 10yr treasury topped 4.7% which is the highest level since October 2022. That is a staggering 60bps move in one month! The analysis here is clear, until we get more proof that either 1) inflation is not bouncing back or 2) growth is slowing, we can expect higher Treasury yields and that will be a headwind for stocks, especially tech stocks.
COMMODITY UPDATE
WTI Crude shot higher this month briefly jumping above $95/bbl before a wave of profit taking into the end of the month and quarter amid overbought conditions pulled it back to closing at $90.79.
Copper also continued its decline but was able to rebound slightly at month end on cooling inflation readings in Europe and moderate downward revisions to U.S. GDP and consumer spending metrics. Improving relations between the U.S. and China was an additional positive. Copper slipped lower to $3.72/oz. Looking ahead, the trend in copper has shifted in favor of the bears. Unless we see copper reverse all the way back towards the $3.85 to $3.90 area, that will remain the case and renewed weakness in copper should be viewed as a negative for the health of the global economy.
October Gold had a rough month battling higher yields and a stronger dollar. Gold finished the month at $1848/oz. Bottom line for gold, the trend is lower, but if we see a further pause in both the dollar rally and recent surge in rates, then expect gold to pause as well with that initial target area in the mid-$1,800s as support.
CURRENCY UPDATE
The Dollar rallied relentlessly again in September to a 10-month high. Despite a late month pullback, the greenback closed at $105.81. Currency markets believe that because the U.S. economy is so resilient that 1) Inflation might bounce back and 2) That resilient economy means that the Fed is the most likely major central to either provide a hawkish surprise by hiking rates more than expected or keep rates higher for longer because of that resilient growth.
Because of that belief, the dollar is relentlessly rallying against its global peers. If U.S. economic data stays solid, then we can expect the Dollar Index to trade towards 110 and, in doing so, increase the earnings headwind on stocks (which will become an increasing negative in the coming months).
ECONOMIC UPDATE
Data over the last two weeks have presented stagflation signals and most of the growth data last week from slow jobless claims, strong durable goods, new orders for non-defense capital goods and the Case-Shiller Home Prices were too hot. Although we avoided a government shutdown, it is temporary.
For markets to find calm, the jobs report this Friday will need to be moderate with a continued slow decline in job additions of mid to low 100k and a slow rise in unemployment. The Jolts report on Tuesday needs to show a decline in job openings to or below 8 million. Finally, on Thursday we will be looking for a higher weekly claims number. Anything close to 250k will be welcomed by markets.
THE WRAP
Stocks will continue to face some strong headwinds so long as rates, the dollar and oil continue moving higher. The Fed has already told us they might need to make additional hikes. However, the more important language of the Fed is that they plan to keep rates higher for longer. This will definitely have an impact on smaller to mid-size companies who need financing. The simple fact is it will take time for the equity markets to adjust to the higher rates. Currently, we are seeing a 19x multiple of 2023 earnings for the S&P 500 which is above its long-term average of around 16x. If the equity markets are going to keep their footing for the rest of 2023 and move higher in 2024, we will definitely need to see more indications of a soft landing for the Fed and a resilient economy that can grow into the 2024 projected earnings of $247 and change. Anything less will spell trouble for equities.
CPK FOCUS
For the month of October, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature.
Our broad focus is on Domestic and International Equities.
As for Domestic Equities, our focus is on Mid Cap Blend and Mid Cap Value and Large Cap Growth and Large Cap Blend with an emphasis in the Technology, Industrial, Energy, Basic Material and Consumer Cyclical sectors.
In International Equities, our focus is on Europe Emerging, Latin America and Europe Developed.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the October 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!