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Weekly Market Performance – Markets Lower For the Second Straight Week Amid Heightened Fears of Midd

| October 30, 2023

Weekly Market Performance – Markets Lower For the Second Straight Week Amid Heightened Fears of Middle East Escalation

Friday, October 27, 2023

Index Performance

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U.S. and International Equities

Markets Lower

Major equity markets sold off for the second straight week as fears of escalation in the war in the Middle East escalated and earnings guidance was generally mixed. Big tech was a notable laggard as the Magnificent Seven suffered their largest decline of the year this week. This week’s market weakness has left the S&P 500 Index in correction territory, down more than 10% from its high on July 31, 2023, and technically oversold.

According to the most recent AAII Sentiment Survey, the percentage of bullish investors declined from over 34% to just over 29%, below the historical long-term average of 37.5%. This week bearish investors jumped to over 43%, above the historical average. Neutral investors declined to 27.5% from 31.3%, below its historical average.  The overall report reflects bearish market sentiment amid a backdrop of a high 10-year yields, some sticky components of inflation, and geopolitical turmoil.

Fixed Income Mostly Higher

The Bloomberg Aggregate Bond Index rebound following last week’s selloff as investor concerns over the Fed’s higher-for-longer message abated as inflation data came in generally in line with expectations. In addition, high yield bonds gained ground this week.

For municipal bonds, outflows (around $10.1 billion year-to-date), large amounts of new issuance (approximately $9 billion), lower reinvestment, and expensive relative value, all against the backdrop of rising Treasury yields, have weighed on prices this year.

However, in a higher rate environment where most of an investors’ total return comes from carry, tax-exempt munis can help shelter more dollars, in general. Additionally, in anticipation of the rate cycle coming to a peak, we may see more demand and a possible reversal in outflows. We continue to believe munis are an attractive asset class for investors with a longer-term time horizon.

Commodities Mixed

Commodities had a mixed week as investors digest strong economic growth in the U.S., the risk of a Federal Reserve response, and a dangerous geopolitical crisis in the Middle East. On Wednesday, the Energy Information Administration’s report showed US stockpiles rose last week by 1.372 million barrels. The increase came as a surprise to energy analysts and economists who expected a gain of about 240k barrels.

Economic Weekly Roundup

Third Quarter GDP

The economy grew 4.9% annualized in Q3 as consumer demand for goods rebounded from the previous quarter and the demand for services was the hottest since 2021. Investment in equipment shrank as the high cost of capital put a strain on businesses. Rebuilding of inventories, a highly volatile component of the economy, added 1.3 percentage points to headline growth and will not likely add to growth in the coming quarter given the nature of inventory management.

September Personal Income and Spending

Real consumer spending rose 0.4% month over month, a rebound from August; whereas, real disposable income fell for the third consecutive month. Consumers are spending more than they are earning. Adjusted for inflation, consumers increased spending in each of the last three months while real disposable income fell over the same period. Clearly, this can’t last much longer. Auto incentives brought in buyers last month as real spending on goods was driven by spending on autos, both new and used. Not surprisingly, international travel was the largest contributor to the increase in real services spending in September.

October German Business Expectations Improve

In a sign of improved sentiment, Germany’s IFO Business Climate Index for October exceeded economists’ expectations. While the aspects contributing to the better-than-expected print are debatable, the optimism could be influenced by several factors, ranging from improving consumer demand to improving supply chain issues. Moreover, it could be influenced by already established lower expectations.

Japan Inflation Hits Record in September

An important measure of Japan’s inflation reports, the weighted median inflation, reached a record 2% year-over-year in September, reaching the Bank of Japan target. The report came in at its fastest pace since the data was first published 22 years ago. Some expect the report to potentially cause the central bank to pull back on its monetary policy accommodation.

Weekly Employment Report

Initial and continuing claims for the latest week came in above economists’ consensus expectation as well as the prior week. We believe the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.

Week Ahead

The following economic data is slated for the week ahead:

  • Tuesday: FHFA Home Price Index (Aug), S&P/Case-Shiller Home Price Index (Aug), consumer confidence (Oct)
  • Wednesday: ADP Employment Survey (Oct), S&P Global PMI Manufacturing (Oct), ISM Manufacturing (Oct), JOLTS Job Openings (Sep), FOMC Meeting
  • Thursday: Weekly initial and continuing unemployment claims, unit labor costs (Q3), productivity (Q3), durable orders (Sep), factory orders (Sep)
  • Friday: Hourly earnings (Oct), average workweek (Oct), manufacturing payrolls (Oct), nonfarm payrolls (Oct), private nonfarm payrolls (Oct), unemployment report (Oct), PMI Composite (Oct), S&P Global PMI Services (Oct), ISM Services (Oct), BEA Total Light Vehicle Sales (Oct)



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