All three major market indexes posted heavy losses for the week, with the Dow Jones Industrial Average falling –1.6%, the broader S&P 500 Index falling –2.4%, and the tech-heavy NASDAQ falling –3.2%. A flurry of uninspiring earnings releases, higher bond yields, and continued global unrest led to the losses. Bond yields meanwhile moved higher, with the yield on the 10-year U.S. Treasury rising 15 basis points to close the week at 4.93%. Early reports this week show a 10-year Treasury yield moving to 5.00%, a level not seen since 2007. Two weeks ago, in this report, we introduced three words in our commentary that we do not take lightly. The words were turmoil, fear, and uncertainty. In this week’s report, we unpack those words and explain why we remain concerned.
The global economy is where turmoil firmly falls on the markets. The Israel/Hamas war continues without any view to a swift or less costly end to the conflict. The Middle East has rarely been a calm place, but relations have certainly been better than they are now among members of the region. For obvious reasons, oil markets and global trade rely on relative calm in the region – major oil producers are located here, and trade through the Suez Canal is a critical route for Asia/Europe trade. The Israel/Hamas War piles onto the Russia/Ukraine War and the China/Taiwan concerns. Hence, our use of the word turmoil – “a state of great disturbance or confusion.”
Policy and Politics
The second word we introduced is fear. Why fear? For the first time in many years, investors are fearing the Fed instead of welcoming the Fed and their concomitant market actions. Last week, in a speech to the Economic Club of NY, where we have two Valley National Group investment associates present, Fed Chairman Powell danced around the future path or direction of interest rates, pointing instead to the data as his compass for what the Fed will do next. Investors hoped to hear language stating that future rate hikes were off the table, but that was not the case in both fixed-income and equity markets sold off because everyone was still waiting for the classic Fed Put. The Fed Put happens when markets expect and price in lower interest rates, not higher ones. So, instead of welcoming Fed actions, markets fear future Fed actions. We believe that the economy remains healthy, which is most evident in the consumer who continues to spend. The labor market, where unemployment remains at a near-record low level of 3.8% and housing, while slower, continues to exhibit resilience.
What to Watch
- Merger activity – there are two major M&A (merger & acquisition) deals on the table right now: Exxon/Pioneer Natural Resources and Chevron/Hess. These mega-billion-dollar mergers provide much needed fuel and profits to Wall Street where M&A and IPOs have been quiet recently.
- U.S. Single Family Houses sold for September 2023, released 10/25/23, prior 675k.
- U.S. Real GDP QoQ for 3rd Quarter 2023, released 10/26/23, prior +2.1%
- U.S. Personal Consumption Expenditure Index YoY for September 2023, released 10/27/23, prior 3.48% (Fed’s favored inflation indicator)
- U.S. Index of Consumer Sentiment for October 2023, released 10/27/23, prior level of 63.
We chose the summary for the week to discuss our third word – uncertainty. We have discussed markets hating uncertainty the most out of all worrisome trends. Typically, in a market where fear and turmoil exist, investors are uncertain, and their natural reaction is a flight to quality, which means buying U.S. Treasuries. However, U.S. Treasuries continue to sell off as the Federal Reserve’s surge in debt supply and mixed signals on the rate path weaken fixed-income markets. Furthermore, our leaders in Washington continue to do nothing as they wrangle to simply fill the U.S. Speaker of the House position, notably the third position in line for succession to the U.S. President.
Uncertainty persists in our leaders, world politics, and the markets, so while it is not unusual for markets to sell off, it is unusual to see such a connected and broad sell-off in all markets in tandem. Treasuries at 5.00% offer investors real after inflation yields. See charts 1 & 2 above by Valley National & Y Charts showing first the U.S. Inflation rate and the 10-year U.S. Treasury yield and second the 10-2-year Treasury Yield Spread.
We expect to see turmoil, fear, and uncertainty in the market until each issue gets resolved over time, and time is always on the patient investors’ side. The patient investor can outlast uncertainty. Reach out to your advisor at Valley National Financial Advisors for advice or questions.