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Better than expected economic data drove interest rates higher, changing the market narrative and contributing to an equity market pullback early in the month. This unraveled expectations of further rate cuts by the Federal Reserve (Fed) and resulted in real rates moving higher. The 10-year Treasury has moved up 48 basis points, ending the month at 4.27%.

It appeared as though the equity indexes were bound to overcome that early pullback, but an end-of-month slide proved to be enough to push the S&P 500 (-0.6%), Dow Jones (-1%) and Nasdaq (-0.1%) into slightly negative territory for the month. The broadening trend we saw last quarter appears to have ended with the slightly higher rates and election uncertainty creeping into the market. Communications services and financials were the best-performing sectors.

The S&P 500 is on track to deliver its second consecutive year of 20+% returns – a milestone it has not achieved since 1998 when the U.S. economy simultaneously experienced a soft landing and a tech revolution. The S&P 500 is also on pace to deliver its strongest performance leading into an election year since 1932.

“After five consecutive positive months, October missed being the sixth by just a few hours when it gave back gains due to tech losses on the 31st,” says Raymond James Chief Investment Officer Larry Adam. “Overly optimistic sentiment and potential volatility surrounding the election leads us to be cautious in the near term.”

We’ll get into more detail shortly, but first, a look at the numbers year-to-date:

The ISM Manufacturing Index revealed contraction in industrial production, which could lead to less upward pressure on the price of inputs, something that is consistent with disinflationary predictions. The ISM Services Index, however, showed considerable growth, laying to rest any fears surrounding an economic slowdown. Strong employment growth, which pushed the unemployment rate back to 4.1%, reinforced our belief that the US will achieve the Fed’s soft landing target amid rate cuts.

Overall housing starts were weak in September largely because of multifamily units, but single-family units were strong in key regions like the Northeast. A significant risk of lowering interest rates is for home prices to increase further, as lower borrowing costs attract more buyers, and contribute further to the affordability crisis.

A close presidential race brings uncertainty

With the 2024 U.S. presidential race just days away, polls are still showing a dead heat between the candidates. The race remains too close to predict, and the outcome will likely come down to votes in a handful of swing states given the electoral college’s winner-take-all system. With each of the two main candidates favoring radically different policy, the outcome could have a lasting impact on economic factors worldwide.

In other news, the Department of Justice’s antitrust case against Google is unlikely to result in a breakup, and nuclear energy has risen to the forefront of the conversation surrounding the colossal energy needs of artificial intelligence as it scales up in the coming years.

S&P 500 continues to break records

October brought about new all-time highs for the S&P 500, which closed at 5,864.67 on October 18. So far, Fed activities have contributed their expected boost to economic growth, with the possibility of inflation sneaking back in as a result of cutting interest rates still on the table, combined with potential tariffs to reenforce the push and pull dynamic of economic outcomes. Outlook on equities remains positive over the next year, but uncertainty and volatility on key macroeconomic drivers could create headwinds.

Yields go up across the board

Treasury yields took a sharp upward turn over the course of the past month, up 40 to 65 basis points from 2 years out to 30 years. The market is anticipating another 25 basis point cut from the Fed during its upcoming November meeting. Corporate and municipal bond yields have increased alongside those from the Treasury, with the most attractive part of the curve in the municipal space in longer maturities. Muni-Treasury ratios remain mostly unchanged since last month.

Oil market grows numb to Middle East geopolitics

Following the threat of all-out war between Israel and Iran, both sides eventually deescalated, cooling off oil prices that had briefly spiked. More than a year after Israel’s war with Hamas began, the oil market seems to have desensitized to conflicts in the region. Day-to-day volatility has refocused back to classic supply-and-demand factors. Mixed messages from OPEC+ suggest the group’s long period of production discipline may be coming to an end, with Saudi Arabia refocusing on market share rather than propping up oil prices. That and China’s quick adoption of EVs could lead to a less than bullish sentiment surrounding oil.

Global macros impact financial markets

October has taught us not to discount worldwide economic trends when it comes to individual financial markets, with three major developments having had widespread influence. First, the Bank of China has foreshadowed a loosening of monetary policy in an effort to meet the growing demands for their slowing economy. However, concerns that it may not be enough for the long term have been raised. Historically, China’s substantial economic growth has been attributed mainly to investment and export activity, and although short-term solutions have worked in the past, their pace may not be sustainable unless a major policy shift is implemented.

Second, the ongoing conflicts in the Middle East remain a source of uncertainty for commodities and equities alike. The worst-case scenario of all-out war between Israel and Iran has been averted for the time being, though the risk of escalation remains elevated as Israel continues its military action in Gaza and Lebanon.

Finally, incoming economic data has led to policy response from central banks. In Canada, interest rate cuts are expected as inflation targets are reached throughout the coming months. European data shows the Consumer Price Index dropped to just 1.7% growth year-over-year in September, and with business stagnation a pressing issue, rate cuts are likely in that arena as well. In Japan, political issues have weakened the Yen, but seemingly helped the country’s highly volatile stock market. The Bank of Japan is favoring steady monetary conditions until the political backdrop becomes clearer.

The bottom line

With all eyes on the upcoming U.S. presidential election as well as uncertainty stemming from conflicts in the Middle East, the broader economic landscape could shift in the coming months. But certain trends remain steady, and markets are continuing to react positively to rate cuts and favorable inflation numbers.

We remain committed to the pursuit of your financial goals and thank you for your continued trust in our guidance. If you have any questions about this report, or need help with anything at all, please don’t hesitate to reach out. Looking forward to speaking soon!

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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Diversification does not guarantee a profit nor protect against loss. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. A credit rating of a security is not a recommendation to buy, sell or hold the security and may be subject to review, revision, suspension, reduction or withdrawal at any time by the assigning Rating Agency.  Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Income from municipal bonds is not subject to federal income taxation; however, it may be subject to state and local taxes and, for certain investors, to the alternative minimum tax. Income from taxable municipal bonds is subject to federal income taxation, and it may be subject to state and local taxes. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. The Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Studies. The Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term. This is not a recommendation to purchase or sell the stocks of the companies pictured/mentioned.  Investing in small-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks. The Nikkei 225 is a stock market index is for the Tokyo Stock Exchange (TSE). It is the most widely quoted average of Japanese equities. The ISM Services Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives. The ISM Manufacturing Index, also known as the purchasing managers’ index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms.

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