October 2023 Market Commentary

The stock market had another rough month in October as sectors most sensitive to the economy were hit hard. The S&P 500 lost about 2.1% during the month, though it is still up over 10% year to date, driven primarily by a more than 34% year-to-date gain in technology stocks. The Bloomberg U.S. Aggregate Bond Index was down about 1.5% for the month, while the 10-year Treasury yield increased. Yields on the 2-year Treasury declined at the end of October, starting at 5.05% and falling to 4.97% on October 31. The 10-year Treasury yield increased from 4.58% to 4.79%. High-yield bonds were down 1.2%, outperforming core bonds. Small- and mid-cap stocks fell 6.8% and 5.0%, respectively. International markets ended the month with losses as the U.S. dollar rose.

Hiring Surged in September

The latest sign of accelerating economic momentum stoked inflation fears and sent long-term Treasury yields to fresh 16-year highs. Employers added 336,000 jobs in September, the strongest gain since January and up sharply from the prior month’s upwardly revised 227,000 gain, according to the Labor Department. Bond and stock prices fell sharply after the report’s release, reflecting concerns that the Fed may need to hike rates more to tame inflation. Average hourly earnings rose 3.4% in September on a three-month annualized basis. The average 30-year fixed rate mortgage rose to 8.01%, the highest since 2000, according to the Mortgage Bankers Association. The unemployment rate held steady at 3.8% in September. Industries with unusually strong job gains included retail, construction and air transportation. Hiring was also solid at restaurants, hotels and nursing homes—all sectors still filling vacancies left by the pandemic.

The latest retail sales report, which shows spending at stores, online and at restaurants, rose a stronger-than-expected 0.7% in September from a month earlier. Consumers are spending on a range of items, including cars and vacations, despite feeling rather downbeat on the outlook. The consumer confidence index of expectations fell below 80 in September, a level that historically has signaled a recession within a year.

Strong spending and job growth is boosting economists’ optimism on the U.S. economy. Economists expect gross domestic product to increase 2.2% on average in the fourth quarter of 2023 from a year earlier. That is a sharp upward revision from the average 1% growth forecast in the last survey. Economists trimmed their forecast for next year, to 1% from 1.3%, but expect the economy to keep growing in 2024 and 2025.

The Consumer Price Index rose 3.7% in September from a year earlier, according to the Labor Department, the same as in August but far below peak inflation of 9.1% recorded in June 2022. Core prices rose 4.1% from a year earlier, down from 4.3% in August. They gained 0.3% in September for the second straight month after smaller gains in June and July. Fed officials in recent comments have signaled that they are likely to hold short-term interest rates steady at their next meeting, October 31-November 1, because the significant rise in long-term rates should slow the economy.

Gasoline prices rose less in September, but prices could rise again because of the war in the Middle East. Grocery prices continued their subdued trend of the past several months, while housing costs are beginning to show the effects of the Fed’s rate increases. The Fed has raised short-term rates to tame inflation by slowing the economy. That process is intended to drive longer-term bond yields higher, which lifts borrowing costs for businesses as well as homes, autos and other big-ticket items.

Where Is the Recession?

Source: Ned Davis Research. As of October 23, 2023.

The Conference Board’s Leading Economic Index (LEI) dropped 0.7% in September, exceeding the consensus of -0.5%. It was the LEI’s 17^th-straight decline, and the largest since April, to its lowest level since June 2020. The LEI has been signaling recession for some time, but one hasn’t materialized. The Conference Board still expects a mild recession in the first half of 2024, though in the latest quarterly survey conducted by the Wall Street Journal, economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.

Outlook

War in the Middle East, rising oil prices, the risk of recession and declining stock and bond prices. One might say, “The future is filled with risks and uncertainties.” But when is this not the case? The future is always uncertain. Market sentiment is like a thermometer that moves from hot to cold. When the outlook is good and the mood on Wall Street is upbeat, stock prices tend to reflect that. The opposite is also true. What the stock market does not currently reflect is a resolution to our current problems. When that happens, stock prices are likely to be higher. That is the history of the stock market. Investment success does not depend on correctly guessing when the mood will change. Instead, it is almost totally dependent on developing a sensible long-term plan and having the discipline and the fortitude to stick to it in good times and bad. Benjamin Graham, known as the “father of value investing” and mentor to Warren Buffett, once said, “It is not immoral to speculate, but it is an unproductive waste of time.” Discipline is the investor’s greatest friend, time his greatest ally.

The mood on Wall Street changes very quickly, but, for most investors, their long-term goals remain unchanged. Traders are like a sailboat, adjusting each time the wind changes direction. But long-term investors are better off thinking like a battleship—staying the course no matter how difficult the conditions at sea. Although the impressive gains in the stock market this year have been trimmed a bit, investors who stayed the course after last year’s bumpy ride have been well rewarded. Our advice remains the same: Stay disciplined, stick to your plan and stay focused on your long-term goals.