Headed into year-end investors must wrestle with the implications of the US Presidential Election and less Fed rate cuts.
October 2024 Monthly Market Commentary
- The S&P 500 fell 0.9% in September, the first decline for the index in five months. Large-cap stocks continued to outperform small/mid (the Russell 2000 Index’s fell 1.4%). Three of the eleven S&P 500 sectors traded higher, with Financials and Communication Services both gaining more than 1.5%, while the remaining eight sectors all fell by more than 1% during the month.
- Corporate investment-grade bonds fell 3.2% as Treasury yields rose, underperforming corporate high-yield which also declined by 1.0%.
- International stocks also traded lower. The MSCI EAFE developed market stock index fell 5.3%, while the MSCI Emerging Market Index fell 3.1%.
Stocks End 5-Month Winning Streak with First Loss Since April
Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. The S&P 500 posted its first monthly loss since April, lowering its year-to-date return to just under 21%. Large-cap stocks slightly outperformed small-cap stocks, but most investment factors produced similar returns.
In the bond market yields rose sharply and bonds traded lower for the first time in six months. The bond market volatility arose after commentary from the Fed suggested it may not cut interest rates as much as investors previously expected. This renewed rate uncertainty, combined with concerns about fiscal spending, drove Treasury yields higher. In our view much of the movement is tied to markets wrestling with the likelihood of continued high government spending regardless of election outcome.
Treasury Yields Spike After the Fed’s September Rate Cut
The bond market has experienced several large swings this year. To put the swings in perspective a brief recap of Treasury Yield changes during the year:
- The 10-year Treasury yield began the year around 3.90%. However, as inflation rose early in the year, the 10-year yield climbed to 4.70% by late April.
- Yields then reversed over summer as falling inflation and rising unemployment fueled expectations for deeper rate cuts. Between late April and mid-September, the 10-year yield dropped to a low of 3.62% during the week of the Fed’s September meeting.
- It may seem counterintuitive, but since the Fed’s September meeting (where it cut interest rates by 0.50%) Treasury yields have risen sharply. The 10-year Treasury yield ended October at 4.28%, rising by over 0.65% in one and a half months.
What’s behind this year’s bond market swings? Volatile economic trends and uncertain Fed policy. Two key data points have increased volatility: inflation surged early in the year before easing over the summer, while unemployment rose from 3.7% in January to 4.3% in July, then fell to 4.1% in September.
The Fed aims for stable prices and full employment, but conflicting data has complicated its interest rate decisions. There’s general agreement that the Fed should continue to lower interest rates, but there’s debate about how quickly and how much. The recent increase in Treasury yields reflects expectations for fewer interest rate cuts. As we’ve seen this year, that outlook could change in the coming months.
This uncertainty will likely keep bond (and stock market) prices volatile into year-end. This will likely be further compounded by uncertainty over the US Presidential election, which we think could drag into year-end as investors and economists weigh the actual impact of the outcome.
ENDNOTES
Disclosures
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
