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Bi-MONTHLY MARKET ANALYSIS &
ECONOMIC UPDATES
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October 26, 2023
Pierce’s Perspective on… The Stock Market in October
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The hunt for red October is in full swing. This historically feared month is once again proving itself a fierce foe. Stocks today continued their decline while the Nasdaq officially entered correction territory, down more than 10% from its yearly high in July. Wall Street’s main indexes dropped today as megacap stocks remained under pressure, while investors assessed the quarterly earnings season and a mixed bag of economic data. The much and anticipated Google and Meta earnings left both companies with a black eye, declining 9.5% and nearly 4% respectively. The 10 year Treasury yield continued to hover near the 5% mark despite easing inflation and disposable income data.
Before we continue, lets step into a time machine back to October 20, 2022 and review our ERPE Excerpts from this day (Click here to review this ERPE Excerpts). Against the backdrop of rapidly rising interest rates, the excerpt said “The economy is headed for recession. A majority of economists think a downturn is coming and most CEOs are preparing for one, as leading economic indicators like I note below point to. The reason? Rapidly rising interest rates. It is perhaps only a matter of when, not if, the U.S. economy enters a “Fed induced recession”.” Is this an accurate prediction of where we are one year later? My gut says absolutely, but lets not rely on that as it has been wrong in the past.
Can we rebound from this correcting market? Since the Nasdaq has taken a beating, lets look at the last 20 historical corrections and the results spanning one week to one year later.
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As the table above indicates, it took an average of three months for performance to improve, with index then gaining 14.4% on average a year later, according to Dow Jones Industrial Average. Lets not forget what the theme of this ERPE Excerpts is… Perspective. Although the powerhouse Nasdaq is down roughly 10%, it is still up 22.5% this year, with the DOW nearly even at -0.3% and the S&P up 9%.
As last weeks ERPE Excerpts stated (which you can review here), this October has already printed a FTD which historically led to a rally. Will this month kick off another rally leading into 2024 and be the “bear killing” month it is known as? There are some positive economic indicators like surprising GDP growth at 4.9%, consumer spending exceeding all expectations, and a very strong labor market. BUT… we are still facing major macro headwinds such as a high rate environment and the world standing on the precipice of a major global conflict. Time will tell if the bulls or bears take control.
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Proper Perspective: In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.
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Famous Quote For Today: “Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning.”
~~Albert Einstein
What Happened On This Day, October 26, 1958 – America’s first jet airliner, the Boeing 707, entered service for Pan American World Airways.
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Global Economic Indicators & Analysis:
POSITIVE INDICATORS
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GDP Soars: U.S. economic growth galloped at a 4.9% annual pace in the third quarter — fueled by a big burst of consumer spending — and defied expectations of a slowdown. The sharp increase in GDP was more than double the rate of growth in the first six months of the year. It was also the largest gain since 2014 excluding the pandemic years of 2020-2021. Consumer spending, the main engine of U.S. growth, rose at a 4% clip from July to September, the government said Thursday. Before the quarter started, the economy was widely expected to slow in response to rising interest rates. Higher borrowing costs typically depress the economy. GDP reveals a lot about where the economy has been, but not where it is going. Right now it’s an open question.
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US Retail Sales Rise: Sales at U.S. retailers jumped a bigger-than-expected 0.7% in September in a sign households have enough buying power to keep the economy expanding. Retail sales represent about one-third of all consumer spending and usually offer clues on the strength of the economy. The retail sales report is the latest to suggest the economy is still expanding at healthy pace and perhaps not decelerating as much as the Federal Reserve would like to help slow the rate of inflation. Consumer spending has stayed fairly healthy because of rising wages and the lowest unemployment rate in decades. What’s more, incomes are finally increasing faster than inflation for the first time in a few years. Yet higher interest rates are pinching households and businesses and are bound to slow the economy in the months ahead. If so, retail spending is also likely to soften.
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US Industrial Output Up: U.S. industrial production rose 0.3% in September, the Federal Reserve reported last Tuesday. The gain was above expectations of a 0.1% gain, according to a survey by The Wall Street Journal. Capacity utilization rose to 79.7 from 79.5 in August. The capacity utilization rate reflects the limits to operating the nation’s factories, mines and utilities. Economists had forecast a 79.7% rate.
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US Housing Starts Rebound: Construction of new U.S. homes rebounded 7% in September to an annual pace of 1.36 million units after a sharp 1.5% drop in the prior month, the Commerce Department said last Wednesday. The construction pace of single-family homes rose by 3.2% in September, and apartment-building construction rose by 17.1%. Permits for single-family homes rose 1.8% in September, while permits for buildings with at least five units or more fell 14%.
Economists say that builders seemed to lose confidence after mortgage rates rose over 7% and they expect housing starts to trend lower in the last few months of the year.
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New Home Sales Surge: Sales of newly built homes in the U.S. surged in September as aspiring homeowners, unable to find inventory in resale homes, turned to homebuilders. U.S. new-home sales rose 12.3% to an annual rate of 759,000 in September, from a revised 676,000 in the prior month, the Commerce Department reported Wednesday. The pace exceeded expectations on Wall Street. Economists had forecast new-home sales to total 680,000 in September. New-home sales are at the highest level since February 2022.
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S&P Flash Services Sector Improves: The U.S. economy improved at the start of the fourth quarter due to slower inflation and fresh hopes that interest rates have peaked, a pair of S&P surveys showed. The S&P flash U.S. services-sector index rose to a three-month high of 50.9, from 50.1 in the prior month. Most Americans are employed on the service side of the economy. The S&P Global surveys are among the first indicators each month to provide an assessment of the health of the economy. Any number above 50 signals expansion, while numbers below 50 point to contraction. The S&P surveys have consistently shown the economy to be weaker than other measures of U.S. growth, so the latest upswing is a positive sign.
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Empire State Factory Gauge Slumps: The New York Fed’s Empire State business-conditions index, a gauge of manufacturing activity in the state, edged down 6.5 points in October to negative 4.6, the regional Fed bank said last Monday. Any reading below zero indicates deteriorating conditions. The drop in October comes after a solid increase in September. The index has been unusually volatile for most of the past two years with some deeply negative readings followed by improvement. Some economists saw signs that manufacturing is bottoming but others are more skeptical of a turnaround.
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Home Builder Confidence Sinks Again: The National Association of Home Builders’ (NAHB) monthly confidence index fell 4 points to 40 in October, the U.S. trade group said last Tuesday. Economists surveyed by the Wall Street Journal had expected a 44 reading. This is the third straight drop in the index, which is low at its lowest level since January. All three gauges that underpin the overall builder-confidence index fell. The gauge that marks current sales conditions fell by 4 points. The component that measures prospective-buyer traffic fell by 4 points. The gauge that assesses sales expectations for the next six months fell by 5 points.
The rise in mortgage rates above 7% has triggered a sharp reversal in homebuilder sentiment, economists said. This signals a possible “second leg down” in housing starts by year end, said economists at Oxford Economics.
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Fed Beige Book Sees Economy “Slightly Weaker”: The U.S. economy exhibited “stable” to “slightly weaker” growth in the early fall, a Federal Reserve survey found, helping to loosen up a tight labor market and ease inflation. Most parts of the country “indicated little to no change in economic activity since the September report,” the Beige Book found. Only the regions served by the Boston, Chicago and Minneapolis Fed posted somewhat faster growth. The economy was unchanged or a bit weaker in the Fed’s other nine regions.
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Home Sales Falls to Great Depression Levels : Home sales in September fell to the lowest level since 2010, as high mortgage rates continue to hammer the housing market. Aside from low inventory, rising rates are eroding buyers’ purchasing power, and drying up demand. Sales of previously owned homes fell by 2% to an annual rate of 3.96 million in September, the National Association of Realtors said last Thursday. Compared to September 2022, home sales are down by 15.4%. The U.S. housing market is in the midst of a serious slowdown that is primarily driven by high mortgage rates. High rates spook home buyers, drying up demand, and high rates also deter homeowners from selling since they may have to purchase another home. For a homeowner with a 3% mortgage rate for the next few decades, there’s little incentive to move.
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LEI Down for 18th Straight Month: The leading economic index sank 0.7% in September and was negative for the 18th month in a row — but the U.S. is still on track to post a sizable increase in economic growth in the third quarter. A big losing streak typically foreshadows a recession, but the economy has continued to expand and many forecasters have dropped their recession calls. The economy shows no sign of being on the verge of recession, but as some analysts note, the late stages of a business cycle rarely give clear hints of a pending downturn.
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Powell Speaks, Rate Increases Still on the Table: Last Thursday, Federal Reserve Chairman Jerome Powell said that the central bank is “attentive” to the recent economic data that shows resilient U.S. economic growth and demand for labor and if that trend continues, more interest rate hikes may be needed. The Fed has raised its policy interest rate to a level of 5.25%-5.5% over the past 19 months. Powell said the stance of policy is “restrictive” putting downward pressure on economic activity and inflation. Powell welcomed the “lower readings” on inflation since the summer, a trend that continued in the most recent reports for September even though these most recent data points “were somewhat less encouraging.”
Powell said that inflation is still too high and “a few months of good data” are only the beginning of what is needed to bring inflation back to 2%.
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Philly Fed Manufacturing Survey in Contractionary Territory: The index improved 5 points but remained at negative 9.0. This is the index’s 15th negative reading in the past 17 months. Some economists are seeing signs of a bottom in the manufacturing sector. The Philadelphia Federal Reserve said Thursday its gauge of regional business activity remained in contractionary territory for the second straight month in October.
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Initial Jobless Claims Slightly Increase: The number of people already collecting jobless benefits in the week ended Oct. 14 rose by 63,000 to 1.79 million. That’s the fifth straight increase and the highest level since May. It could be a sign that workers are having trouble finding new work quickly. The low jobless claims suggest that employment conditions remain very strong and economic growth might not slow in the fourth quarter as many economists expect. As such the Fed might need to raise rates a bit further. Low claims mean few layoffs. The rise in continued claims could mean that hiring is slowing down.
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Call me if you have any questions. I am always happy to help!
John J. Gardner, CFP®, CPM®.
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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.
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Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®)
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