November 8, 2024

As we pack away the skeletons and cobwebs until next year, we reflect back on what was a frightful month of October in financial markets. Investors were treated to another tumultuous month of stock market performance and a mixed bag of economic data. In a spate of ominous cooperation equites and bonds were broadly down for the month, leaving investors little room to hide.

Despite establishing a new all-time high mid-month, the S&P 500 retreated through month end to finish -0.91% for October.¹ Valuations and concentration have been ongoing topics of concern, especially within the S&P 500 index. According to data from JP Morgan, the S&P has reached a valuation level that historically portends modest short-to-intermediate term returns while the ten largest components of the index now account for 36% of the index itself.²  While these factors may sound spooky, investors may just be scaring themselves. While valuations are somewhat elevated relative to historical averages, valuation is also widely acknowledged as an imprecise indicator of future returns with low explanatory power in historical observations. Similarly, the level of concentration currently observed within the S&P is unprecedented but also tends to ebb and flow over time.

The top ten S&P constituents nearly reached 28% weighting within the index in the late 90s/early 2000s before creeping back down to roughly 17% in 2015.²  Further, the strong returns of the S&P over the last few years is directly tied to the performance of these largest components, particularly the so-called “Magnificent 7” (referring to Apple, Amazon, Google, Meta, Microsoft, Nvidia, and Tesla). JP Morgan calculates that 30% to 60% of annual returns since the beginning of 2021 are attributable to these seven stocks.³ Key indicators of the quality of these businesses, such as earnings growth and profit margins, also dwarf the remainder of the S&P constituents³ leaving investors to ponder whether these stocks don’t deserve to be significant weights within the index.

Elsewhere in U.S. equity markets, small cap stocks delivered their own hair-raising ride. After surging over 3% into mid-month the Russell 2000 index closed at -1.44% for the full month¹ as rising interest rates, and their potential impact on growth prospects, weighed on the small cap universe. Small caps are widely believed to be more interest-rate sensitive than their large-cap peers so their path forward through the remainder of the year may be impacted by the fluctuating interest rate environment.

International stocks were ghoulish, falling even more dramatically than their U.S. counterparts. Developed markets, as represented by the MSCI EAFE Index, were down -5.44%¹ as many non-U.S. economies are still grappling with persistent inflation and sputtering economic activity. Emerging markets also saw a frightful dip in October with MSCI Emerging Markets index closing -4.45% for the month.¹ After delivering its strongest month of the year in September, the index took a measurable step back while geopolitical tensions weigh on international investors’ minds and budding enthusiasm for China’s recently announced stimulus initiatives waned.

Bond markets also experienced their share of chills and thrills in October with the Bloomberg U.S. Aggregate Bond Index delivering -2.48% return for the month. Beyond core bonds, most fixed income sectors also saw negative returns for the month, notably with TIPS returning -1.79% and High Yield Bonds posting -0.55%.5 The 10-year Treasury yield continues to climb following the Federal Open Market Committee’s (FOMC) first rate cut in mid-September. In October alone yields on the 10-year rose half a percent.⁴ With the FOMC lowering shorter-term rates and longer-term rates rising a normalizing yield curve is generally seen as a positive indicator, but it does increase longer-term funding costs and create near term headwinds for fixed income investors.

Economic data was mixed over the month. Inflation prints for September continued to decline with year-over-year change in the Consumer Price Index (CPI) falling to 2.4%.6 Retail sales figures for September showed a resilient consumer while jobs reports were broadly positive despite a slight uptick in the unemployment rate to 4.2%.⁷  The Institute for Supply Management’s (ISM) manufacturing index saw a slight decline.⁸ The housing industry continues to struggle under an elevated and volatile interest rate environment with the National Association of Realtors Pending Home Sales Index now flirting with COVID lows.⁹

Looking ahead to November, markets - and especially the financial media - will be focused on Election Day. For more background on elections and their impact on equity markets, please read our piece Presidential Elections and the Stock Market.

As we wrap up a frightful October in financial markets, investors may not be out of the woods yet. What has been a strong year for most portfolios may still have to weather a contentious environment following the U.S. Presidential election. As always, we encourage investors to focus on the factors that they can control and maintain a long-term perspective when it comes to achieving their personal financial goals.

Hunter Brooks
Portfolio Manager

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