Before I start into market commentary, now is the time of year when we start trying to reduce capital gains exposure in client portfolios. If you have large gains or losses from other assets, like real estate or investment accounts, I encourage you to update your advisor on this. We might be able to offset some gains or losses if you can keep us apprised of your tax situation.
Also, time is running out to make required distributions, including qualified charitable distributions, from IRAs. If you intend to do that, please call us soon so that we don’t miss upcoming deadlines.
As for investments, a big story has been the U.S. economy’s outperforming expectations despite the Federal Reserve’s efforts to lower inflation by raising interest rates. In October, this theme continued as headline economic data reflected a resilient U.S. economy, even as volatility stirred up financial markets.
Some of the data reported included third-quarter retail sales, which were much higher than expected. September saw 336,000 nonfarm jobs added as unemployment remained at 3.8%. And, most importantly, the U.S. economy grew at an annualized rate of 4.9% in the third quarter, more than twice the second quarter’s 2.1%. In fact, this was the economy’s highest growth rate since late 2021.
The unrelenting rise in Treasury bond yields was a major investor concern. The 10-year and 30-year bond yields rocketed to fresh 16-year highs before easing a bit. There was also a lot of focus on geopolitical risks after the attack on Israel by Hamas and on fear of a spillover into a conflict with Iran and its allies. All of this helped gold to its best month since March, rising nearly 7%. After an initial spike on the Israel news, oil came off its peak, with West Texas Intermediate crude finishing the month down 10.8%. Stocks have had a history of looking past geopolitical events and this has been no exception so far, but the possibility that the situation could escalate hangs over an already jittery market.
The third quarter corporate earnings season was another major focus. As of October 31, more than half of S&P 500 constituents have reported results with an average earnings growth rate of almost 3%, besting expectations for a decline of 0.3%. However, the market has been punishing earnings misses more harshly than in recent quarters… even earnings beats have been punished if the results weren’t full of hope about the future. This is often a symptom of a market that is overpriced—when even good earnings reports aren’t enough to push prices higher.
Continued bearish sentiment affected stocks in October. US equities were down for the month of October, with the S&P and Nasdaq both entering correction territory after dropping more than 10% from their July peaks. I’ve heard several comments recently about how bad the stock market is and, to be sure, it has not been an ideal environment. It’s worth remembering that a 10% intra-year decline in the market has happened every 1 ½ years on average, so this pullback is hardly a rarity. In fact, it is to be expected and even embraced. Without volatility, stocks would likely earn a rate of return more like cash alternatives or CDs. So, while volatility can be uncomfortable, it is what allows for higher expected returns in the long run.
Despite the overall tone, multiple bullish dynamics remain in play. We have a Fed that is likely to keep rates steady rate than raising. Many stock prices are very oversold, leaving more room for upside. Some analysts believe that consumers are still very strong, and there is a lot of evidence to back that up. The demise of the consumer has been a popular prediction for a year now, yet as evidenced by the tremendous retail sales data, the consumer may still have room to run. Further, we are now in the best-performing season of the year for stocks (historically).
Higher interest rates have made bonds and other fixed-income instruments like CDs look more attractive. We’ve noticed that we can find yields on bonds that are higher than what are proposed in our clients’ financial plans. This means that we may be able to reduce risk for your Signature Life Plan while maintaining its likelihood of success. It is worth checking with your advisor to see if this applies to you.
Finally, stock markets will be closed on November 23 for Thanksgiving, and they’ll close at 1:00 on the following day (Friday the 24th). Many of our advisors will be enjoying time with family and friends, and I hope that you can, too.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.