Market Update: November 7, 2023

Economic data for the week included the Federal Reserve holding interest rates steady, ISM manufacturing and services both showing declines, gains in home prices, while the employment situation report showed job positive gains, but at a weaker pace than expected.

Equities rose globally as hopes of central bank peak rates looked increasingly likely, and acceptable (not too good or too soft) U.S. economic data. Bonds fared positively as interest rates declined sharply following the FOMC meeting. Commodities were mixed, with crude oil prices pulling back.

U.S. stocks experienced sharp gains last week, in fact the best week of 2023 thus far. Early week results were strong with news of a tentative agreement between the United Auto Workers and GM. The somewhat dovish comments from the FOMC after their policy meeting mid-week also appeared to strongly propel sentiment for several days, as chances for a December hike appear to remain low. Friday’s weaker jobs report also provided some reassurance that labor markets might be cooling, also lessening the chances of further tightening needs. There appeared to be high volume from larger firms as well, including tax loss trades before the common Oct. 31 fiscal year end.

Every sector ended higher, led by the diverse groups of financials and consumer discretionary, each up over 7%, followed by communications. Weakest were the defensives of consumer staples and health care, along with energy, up minimally as oil prices fell sharply. Real estate also gained over 8% on the week, with a tempering in interest rates. Small cap stocks reversed their stretch of weakness by outperforming large caps, with an implied removal of even higher rates as a headwind.

For S&P 500 earnings in Q3, over 80% of companies have now reported, with that same percentage reporting a positive earnings surprise and over 60% showing a positive revenue surprise (per FactSet). Naturally, expectations had been set very low in advance, with companies not meeting expectations being punished far more than normal. The blended growth rate has improved from around flat (-0.3% on 9/30) to a positive 3.7% on a year-over-year basis, turning around a string of weaker quarters. Growth has been driven by firms with more than half of revenue originating in the U.S. (8% earnings growth), in contrast to firms with majority foreign revenues (-4% earnings decline). Earnings estimates for Q4, though, have fallen back several percent in the last few weeks from 8% to now 4%, although 2024 is still expected to see robust earnings growth of 12%. Some economists are skeptical.

Foreign stocks performed largely in line with U.S. equities, with Japan and Europe outperforming, with favorable currency influences, while the U.K. ended with less sizable gains. In emerging markets, commodity-oriented nations Mexico, South Africa, and Brazil (which lowered interest rates by 0.50%) outshined all others, with China also showing gains. The Bank of England remained on hold. Europe is in somewhat the opposite position as the U.S. Fed, where by keeping rates stable, investor hopes are closer to rate cuts, considering the weaker economic growth environment there, particularly in manufacturing and exports. The Bank of Japan alluded to a relaxing of yield curve control, by removing on a hard cap of 1% on 10-year yields (redefining it now as a ‘reference rate’), and an ultimate exit from their quantitative easing program. This allows yields to ultimately drift higher and potentially stop the weakening of the yen, due to the relationship of (all else equal between two currencies) a rising yield tending to result in currency strengthening. Inflation has indeed been lower in Japan than in the U.S. and Europe, but higher than they’re used to, necessitating the change.

Bonds gained as interest rates fell back last week, with the 10-year Treasury yield down nearly -0.30%, but mostly in the few days on and after the FOMC meeting. The lack of hawkish rhetoric and some pullback in economic and jobs data also contributed to the yield decline. Investment-grade corporates outperformed governments, while high yield ended best of all. Foreign bonds, mostly in emerging markets, fared strongly with 3+% gains along with the U.S. dollar falling over a percent. There was some question about the size and scope of the Treasury’s quarterly refunding auction last week, with $112 bil. in Treasuries sold (lower than expected). Concerns continue to swirl around the size of the likely U.S. budget deficit and subsequent government financing needs, relative to the expected demand for bonds as yields globally move to more attractive levels.

Commodities were mixed, with sharp declines in energy offset by gains in agriculture and industrial metals. Crude oil price fell -6% last week to $81/barrel, with some concern over geopolitical escalation in the Middle East abating.

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.