In October 2023, we observed a decline in the stock market for the third consecutive month. Major benchmark indexes saw a notable decrease in performance. The NASDAQ (1) and the S&P 500 (1) experienced their worst October since 2018, with the NASDAQ closing down by -2.78%, the S&P 500 down by -2.2%, and the Dow (1) showing relative resilience but still down by -1.36%. (2)

The prevailing cautious sentiment in the market can be attributed to the belief that the Federal Reserve would maintain higher interest rates for an extended period. Since mid-September, when the Fed released its forecasts of strong economic growth and fewer rate increases, both equities and bonds felt the pressure. However, we witnessed a positive turn of events following the Federal Reserve’s meeting on November 1. The Fed chose not to raise rates further and provided positive insights, leading market participants to believe that peak rates may be behind us and that there could be rate cuts in 2024. In response, stock and bond prices rebounded, and the yield on the US 10-year treasury dipped from the 5% threshold to around 4 ½%. This shift marks a significant move in the US treasury bond market.

Nevertheless, it’s important to note that it’s too soon to declare an “all clear” about higher interest rates for a longer duration. The bond market still grapples with supply and demand dynamics. The supply of bonds is increasing as the US government continues to issue treasuries to fund its elevated spending. Meanwhile, three significant buyers of US treasuries – the Federal Reserve, banks, and foreign governments – have reduced their purchases. This discrepancy between supply and demand, along with government debt and deficits, presents ongoing challenges to bond market dynamics and the broader economy.

We held a webcast featuring Barry Knapp of Ironside Macro Economics on November 1, immediately after the Federal Reserve’s announcement. Knapp shared insights on the market’s favorable reaction to Chairman Powell’s messaging and emphasized the importance of listening to further communications from the Fed in the days to come. Following the Fed, jobs data came in weak last Friday, Nov 3rd, and the unemployment rate also ticked up. So far, so good. The S&P 500 and Nasdaq Composite surged the week ending Nov. 3rd by 5.9% and 6.6%, respectively, for their biggest weekly gains since November 2022. The Dow Jones Industrial Average had its strongest one-week performance since October 2022, popping 5.1%. (3)

Knapp described the current market conditions as an “Unstable Equilibrium” in his recent commentaries. He pointed out that the Federal Reserve faces a conundrum it created. Its primary monetary tools manipulate interest rates, and these policies have had a significant impact on interest rate-sensitive sectors, such as residential and commercial real estate. Higher rates have also posed challenges to the banking system, leading to bank failures in the spring of 2023. The dynamics of these issues are still in play. Mortgages at 8% and higher home prices have made home affordability the most expensive since 1985. The commercial real estate sector faces a wall of maturing debt to refinance. The office sector was hit hardest as rental income has not kept up with increases in debt servicing costs. Additionally, there are significant multifamily construction projects financed with construction loans, and the rising interest rates have increased the cost of permanent financing for these projects. Regional banks, the traditional providers of this credit, are under pressure due to higher interest rates and have tightened lending standards, exacerbating the issue for projects seeking credit. If the Fed continues with higher rates for an extended period, these issues may persist, potentially creating larger problems. The winners in all of this are private lenders as their deal flows are robust, and they are in a position of power to set terms and be selective as to which deals they fund.

On a more positive note, the Federal Reserve’s actions and market reactions since November 1 suggest that they may achieve their desired economic slowdown and higher unemployment, aiding in reaching their inflation objectives. If data aligns with their goals and inflation concerns diminish, they may ease their grip on “higher for longer” interest rates. This could take pressure off the interest-sensitive sector of the economy and lead to a virtuous cycle of increased productivity and capital spending, revitalizing our economy and markets. Last week was an encouraging reversal for the markets. If the interest rate environment continues to improve and stabilize, the outlook for equities brightens.

An intermediate scenario could entail the Fed maintaining an “unstable equilibrium” with conflicting messages and increased uncertainty. While the economy may continue to show resilient growth with a robust labor market, interest rate-sensitive sectors could suffer to the extent that an economic downturn occurs, leading to financial institutions struggling. In this scenario, the Fed might opt to cut rates or adjust its inflation target to mitigate the risk of triggering a credit crisis.

Regardless of the immediate market fluctuations and uncertainties, we must remember that we are long-term investors with enduring goals. We need our investments to sustain us for the long run. Overreacting to unpredictable events beyond our control is counterproductive. While we maintain a cautious stance in our portfolio allocations, we remain invested and diversified because our eyes are on the horizon, focused on the long term.

As the year-end approaches, we will be reviewing financial plans, considering tax mitigation strategies, and adjusting portfolios. If you haven’t recently reviewed your financial plans with us, we encourage you to do so. We continue to reach out to our clients for reviews, but you are always welcome to reach out to us as well. Your portfolio reports and monthly statements have been posted to your eMoney vault.

Thank you for your trust and your commitment to your long-term financial well-being. We wish you and yours a warm season of Thanksgiving.

With Gratitude,

  1. NASDAQ, S&P 500, Dow – are unmanaged groups of securities considered to be representative of the stock market in general.
  4. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
  5. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.
Tim Waterworth

More about the author: Tim Waterworth

Tim is licensed as a Registered Representative with Kestra Investment Services, LLC, and an Investment Advisor Representative with Kestra Advisory Services, LLC. He holds himself to a fiduciary standard, which means he is obligated to put the best interests of his clients first.