October Market Review

October Market Update‍

Much has been written about the U.S. economy exceeding traditional forecasts while the Federal Reserve (Fed)campaigns to decrease inflation by increasing interest rates. During the month of October, this narrative persisted as significant economic statistics revealed a resilient U.S. economy, despite turbulence in the financial markets.

The data revealed a great deal of information, including statistics stating that third-quarter retail sales were higher than expected. 336,000 nonfarm jobs were added in September, and unemployment held steady at 3.8%. Most importantly, the U.S. economy increased at an annualized rate of 4.9%, up more than twice the 2.1% of the second quarter.

Do these statistics mean that there is no threat of a recession? Although some analysts may change their expectations based on these results, it is still important to exercise caution when developing a forecast based on backward-looking indicators. While optimism is understandable, overly exuberant forecasting should be mediated by historical events.

Raymond James Chief Investment Officer Larry Adam says, “The question is: can the economy pivot that fast from robust growth to a recession? History says it can. In fact, in the last 12recessions, the quarter before the recession begins, GDP growth averaged 2.6%.The quarter the recession began, growth was down 3.5%. That’s a quick turnaround.”

Even with the positive outcomes of the third quarter, the Raymond James Investment Strategy Committee expects a mild recession in early 2024.

Global events, underlying economic conditions, and rising interest rates contribute to an environment of uncertainty, and increased volatility. More information on those details can be found below.

A Look at Equities

Although supported by seven technology stocks that were all high-performing, equities continued to pullback during a tumultuous October, facing numerous challenges, including: increasing Treasury yield, low corporate earnings, global geopolitical conflicts, and fluctuating energy prices. The significant influence of these high-performing stocks has concealed the underlying reality of a challenging stock market. Almost half of all S&P 500 stocks are in a bear market when compared to their 52-week highs, and the average S&P stock is down 3.1% for the year. This one-dimensional market is primed for volatility, as there are too many eggs and too few baskets.

Reading the Fed’s Concerns

After fixed income markets weathered a fluctuating October, substantial economic data left investors wondering if the Fed will increase interest rates beyond expectations. Meanwhile, the 10-year Treasury ended the month at 4.90% as high yields created further downward pressure on the secondary market. The yield curve inversion, in which short-term yields are higher than long-term yields, began to reduce as Treasury yields with maturities two years and under decreased slightly throughout October and yields for maturities five years and over increased anywhere from 21 to 36 basis points. Historically, a yield curve inversion has been regarded as a reliable predictor of a future recession.

Risk Tolerance Plummets Globally

Despite the fact that the economic impact of the Gaza conflict is likely to be limited, investors are seeking traditional safe havens, including U.S. dollars and gold, as the risk of escalation across Gaza increases. The dollar’s performance stands out among falling stock markets and rising sovereign bond yields. This is a reflection of the dramatic increase in sensitivity to equity market weakness and the importance of risk sentiment.

Old Issues Loom as U.S. House Chooses New Leader‍

Kevin McCarthy of California was ousted from the House of Representatives on October 3 after making a stopgap deal to prevent a shutdown. The new election of Mike Johnson of Louisiana to the House speakership continues to lessen the likelihood of a shutdown. Current expectations suggest that there will be another short-term funding bill to fund the government after the November 17 deadline. Keep an eye out for Congress’ ability to pass all 12 Appropriations bills to avoid a 1% spending cut across the board that is triggered in January.

Energy Uncertainty Results from Conflicts

The Bottom Line

Late-summer markets tend to perk up in October, but this year, the markets have been impacted by numerous global events. It can be tempting to adopt a gloomy outlook based on these challenges, but it is worth remembering that the U.S. economy has remained a symbol of strength in the world throughout this time. Additionally, as inflation trends downward, evidence suggests that even if there is a recession in 2024, it will likely be mild.

Regardless of what the future may bring, your GDS Wealth Management team is here to help you navigate these challenging times. Thank you for your continued partnership and trust in our team. If you have any questions at all regarding your financial plan or any of the news discussed in this market update, please reach out to one of our team members.