Monthly Market Update – October 2023

Key Points

• Yields Touch 5% The benchmark 10-year U.S. Treasury yield rose for the sixth-straight month, and towards the end of October, it crossed 5% for the first time in 16 years. Treasury yields play a big role in determining borrowing costs across the economy and have pushed mortgage rates to 8% and credit card rates above 20%.
• GDP Heats Up The third quarter GDP report released in October was surprisingly strong, exceeding Wall Street forecasts and demonstrating a very resilient U.S. economy. The data shows why the market was pushing yields higher, making the Fed’s fight against inflation more difficult.
• Jobs Hot, then Not In early October, the September Employment Situation report showed the economy added 336k nonfarm payrolls, nearly twice what was expected. But on Nov 3, the Department of Labor announced jobs added in October were just 150k, less than expected—and September was revised down to 297k.
• Earnings Update Third quarter earnings season is winding down, and like much of the other economic data recently, results are mixed. 71.2% of companies have beaten Wall Street estimates, on the high end of historical results. But revenue beat rates are running around 60.3%, lower than usual. And those cutting forward guidance is running at a 10.8% rate, which is at the high end of historical results.
• Seasonality The seasonal tailwinds that typically begin to kick in during October were MIA this year, but the real strength has historically begun in November. November is the second best-performing individual month for the S&P 500, and it also begins the best two-month returns (November-December) and the best six-month return period (for data going back to 1950).

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of October 31, 2023. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

In terms of seasonality, October typically becomes more favorable for investors. Unfortunately, in 2023, October brought more tricks than treats for the markets. It was another month of disappointing performance for virtually all asset classes, as yields continued to press higher and both stocks and bonds dropped for a third straight month. The benchmark 10-year U.S. Treasury yield rose another +36 basis points (bps, or +0.36 percentage points) in October, coming after a +46 pop in September. Near the middle of the month, the 10-year yield crossed above +5.0% for the first time since 2007 but then settled back to 4.93% by the end of the month. As discussed last month, the “higher for longer” message from the Fed has taken hold with investors, and October saw yet more corroborating economic and inflation data. Concerns about the burgeoning budget deficit and the escalating Israel-Hamas conflict also added to the upward pressure on yields. The Bloomberg US Aggregate Bond Index fell -1.6%, the sixth straight month of negative returns (bond prices move inversely with yields), the longest streak of consecutive monthly declines since 2017. International bonds (the Bloomberg Aggregate Global Bond Index ex U.S.) fared better but were still negative, sliding -0.9% for the month. 

The same concerns pushing yields up weighed stocks down. In fact, since the S&P 500 peaked at the end of July, 10-year Treasury yields have jumped nearly a full percentage point. The S&P 500 Index fell -2.2% in October, following September’s -4.8% drop and a -1.6% decline in August. That has pushed the benchmark index into correction territory (a more than 10% drop from the closing high on July 31). Losses were broad-based, with 10 of 11 sectors losing ground, only Utilities were able to close positive (+1.3%). The tech-heavy Nasdaq Composite Index also entered correction territory during the month, finishing October down -2.8%, which followed declines of -5.8% and -2.2% in September and August, respectively. The small-cap Russell 2000 Index performed the worst of the U.S. indices for the month, down -6.9%. The Russell entered correction territory back in September and finished October less than -2% away from bear market territory (a more-than-20% decline from the closing high on July 31). October was the widest underperformance relative to the S&P 500 in seven months. It wasn’t any better overseas, with developed market international stocks (the MSCI EAFE Index) falling -4.1% and emerging market stocks (the MSCI Emerging Markets Index) down -3.9%.

On the economic front, October saw a flurry of data reiterating the resilience of the US economy and emphasizing the higher-for-longer Fed mantra. To be sure, economic data continues to be mixed and often confounding. The Conference Board reported that Consumer Confidence fell in October for a third straight month. Meanwhile, the University of Michigan Consumer Sentiment index fell for the fourth consecutive month in October, hitting its lowest level since May. Yet October also saw strong Retail Sales, a blockbuster Nonfarm Payrolls Report, and a blowout GDP print of +4.9% economic growth for the third quarter. So, although the consumer is in an increasingly foul mood, as measured by the consumer confidence and sentiment readings, they are still consuming and fueling the economy at a healthy clip. Perhaps the consumer mood is being driven by inflation, which came in hotter-than-expected in October for the Fed’s preferred Core PCE measure, but the latest headline CPI figure was a flat +3.7% year-over-year, which is down considerably from last June’s peak of 9%. So, the market is clearly pricing in yields based on what the consumer is doing rather than how they are feeling, implying the Fed will have to hold interest rates at current levels for longer than investors were expecting. That is on top of other factors contributing to higher yields, such as the elevated geopolitical risks, larger-than-expected deficits, and uncertainty about a potential government shutdown again (the current stopgap Continuing Resolution spending bill passed on September 30 is set to expire on November 17). Yields did drop in the first few days of November, following a surprisingly low October Nonfarm Payroll number, but it will take more than just one weak jobs report to relieve the high and rising rates.

Although seasonality didn’t provide a tailwind in October, there is still hope for the remainder of the year. Now that stocks have declined for three straight months—the first three-month losing streak since January-February-March of 2020—the odds favor a reversal. Stocks haven’t been down for four straight months since 2011 and haven’t been down four straight months ending in November since 1946! And historically, November is the best-performing month for the S&P 500, and it also begins the best two-month returns (November-December) and the best six-month return period (for data going back to 1950). Seasonality isn’t an investment strategy, and for long-term investors, this is all noise, but for those unnerved by the choppy markets lately, the probability for some near-term relief may be welcome. It’s very early in the month, but at the time of publication, the S&P 500 had gained each of the first four days of November for a month-to-date return of +4.1%.

Source: Bloomberg, as of October 31, 2023.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

YIELDS TOUCH 5%

Bond prices extended their sell-off in October as yields continued to climb, with the benchmark 10-year U.S. Treasury yield up for the sixth-straight month, ending the month at 4.9.%, up from 4.57% at the end of September. At one point in the final week of October, the yield on the 10-year Treasury note touched 5% for the first time in 16 years. That’s great news for pension funds and fixed-income savers that are receiving income that seemed impossible just two years ago when the benchmark yield was still under 2%. But the quick rise to 5% is spurring a debate on how disruptive the climb may be. Treasury yields play a critical role in determining borrowing costs across the economy, and their nearly two-year surge has driven 30-year mortgage rates close to 8%, pushed credit card rates above 20%, weighed on stocks, and created concerns that the economy could finally fall into a recession. Those concerns have receded with the retreat of yields back to 4.57% at the close on Friday, November 3.

U.S. Treasury Yield Touches 5% for the First Time Since 2007

Even though the Fed pauses rate hikes, the markets send yields higher

Source: Bloomberg.

GDP JUMPS TO 4.9% AS THE ECONOMY HEATS UP

U.S. economic growth for the third quarter was hotter than expected. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., increased at a +4.9% annual rate, ahead of expectations for +4.5% and the +2.1% reading in the second quarter. The GDP increase marked the biggest gain since the fourth quarter of 2021. Personal Spending surged +4.0% from +0.8% in the second quarter and accounted for 69% percent of the GDP growth. Excluding the pandemic period, that was the fastest rate of consumer spending since 2019. Government Spending also continues to contribute a big chunk to GDP growth, up +4.6% from 3.3% last quarter and making up 17% of the third quarter GDP. On the negative side, Business Investment sank to +0.8% from +5.2% in Q2. The report shows that consumers haven’t slowed spending despite higher interest rates, higher gas prices, and the resumption of student loans. The hot economic growth will make the Fed’s fight to bring down inflation more difficult but also shows that a soft landing without a recession is still possible.

U.S. Real Gross Domestic Product

Annualized percent change from previous quarter

Source: CNBC.

UNEXPECTEDLY HOT TO UNEXPECTEDLY NOT

The Employment Situation report released in the first week of October showed much stronger hiring in September than expected. As originally reported, U.S. employers added a seasonally adjusted 336,000 Non-Farm Payrolls during the month, up from a positively revised 227,000 in August (originally 187,000) and almost double Wall Street expectations for 170,000. July was also revised higher, to 236,000 from 157,000. The surprise increase in hiring sent yields higher because it was viewed as a major complication in the Fed’s decision on whether to pause raising interest rates or hike again to combat the hot job market and wage increases, which add to inflation pressures. But on November 3rd, the October jobs report was released by the Labor Department, and it painted a very different picture of the labor market. Hiring in October was much weaker than expected, with just 150,000 Non-Farm Payrolls added during the month, well under Wall Street expectations for 180,000. Moreover, the September jobs creation was revised down from the original 336,000 to 297,000. That now marks eight of the last nine months of downward revisions–including six straight months of negative revisions from January through June that was the longest streak of negative revisions since the Global Financial Crisis. If the jobs market is consistently being overstated, perhaps the Fed’s job of reigning in inflation is working, and yields are due to come down.

September and October Jobs Reports Paint Different Picture

Annualized percent change from previous quarter

Source: U.S. Bureau of Labor Statistics, CNBC.

EARNINGS UPDATE

Bespoke Investment Group data shows 1,126 companies have reported earnings so far for the third quarter, and 71.2% of them have beaten Wall Street estimates. That’s a relatively high beat rate, falling in the 82nd percentile of all earnings seasons since 2001 and the highest beat rate since Q1-2022. Unfortunately, the beat rate for top-line revenues isn’t keeping up. Revenue beat rates are running around 60.3%. Two quarters ago, they were the same as EPS beat rates, but now they’re the lowest since Q4-2016, basically around the median historically. Bespoke also notes that companies raising their forward guidance is slightly higher than the historical median, while those cutting forward guidance is running at a 10.8% rate, which is about the 74th percentile. Stated simply, company guidance is relatively weak this quarter. Overall, this earnings season suggests disinflation is hurting company revenue beats while helping EPS beats (via lower costs). That’s quite a contrast to earnings in 2021 and 2022, when accelerating inflation helped boost revenues but weighed on earnings due to higher costs.

Percent of Companies Beating Earnings (ESP) and Revenues Estimates by Quarter

Source: Bespoke Investment Group. Data as of 11/03/2023.

COMING UP—BEST 2 MONTHS AND BEST 6 MONTHS

The seasonal tailwinds that typically begin to kick in during October were MIA this year, although it certainly lived up to its reputation as the most volatile month. And seasonality hasn’t been top of mind with all the headlines around the geopolitical conflicts, the GOP House Speaker uncertainty, a very busy earnings season, and all the attention around the Fed and rates. But the real strength in seasonality has historically begun in November. As shown below, for data going back to 1950, November is the second best-performing individual month for the S&P 500, and it also begins the best two-month returns (November-December) and the best six-month return period (November – April). With an average return of +1.47% and positive returns 66.7% of the time (third best month behind December and April). According to the Bespoke data, collectively, November and December make up the best two-month period of the year with an average gain of +3.0% and gains 75% of the time. The Stock Traders’ Almanac has long recorded the dynamic of the best six-month period for data since 1950, in which the S&P has averaged about +7% return from November through April versus less than 2% for the “Sell in May and Go Away” May through October six months.

Seasonality Improving

S&P 500 Average Monthly Performance: 1945-2023

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.