Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of November.
GLOBAL
TRENDS
After restrictive monetary policies helped to curtail persistent inflation, most global economies have begun to lower interest rates to help foster growth and support global labor markets. Short-term interest rates from most of world’s largest central banks are still elevated relative to the last decade which adds pressures to global financial systems.
Additionally, geopolitical conflicts in Western Europe and the Middle East have added to economic uncertainty. Aside from the human tragedy that is always associated with War, these conflicts have also added to risks and volatility for financial markets.
Taken together, recent global and economic actions have kept investors on edge. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. This is likely to continue in the second half of 2024, though at a slower rate than historical norms.
CENTRAL BANK
POLICIES
The Federal Open Market Committee (FOMC) last met on September 18th and lowered interest rates by 50 basis points leaving their target range for the Federal Funds rate at 4.75%- 5.00%. In a prepared statement by the Federal Reserve, it was noted that, “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent…”
The statement continued and spoke to the decision to lower interest rates by noting, “… the committee decided to lower the target range for the federal funds rate by half percentage point…” to ensure, “… supporting maximum employment…” The committee meets again early in November and markets are expecting an additional 25 basis point cut at that meeting and one final 25 basis point cut at the December meeting.
The European Central Bank (ECB) last met on October 17th and lowered their target interest rate by 25 basis points, the third rate cut this year. In a prepared statement it was noted that future decisions will be: “… based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.” At the end of October, market participants expect another 25-basis point cut for from the ECB during in its final meeting of the year in December.
EQUITY
PERFORMANCE
After rallying over the first three weeks of October, the S&P 500 finished October in a down trend and posted losses on the month. Looking at the major sectors in the S&P 500, only 3 sectors posted gains with financials leading the way and returning over 2.5% in October. On the other hand, 8 sectors posted losses with real estate, material, and healthcare all dropping at least 3.0% over the month.
Third quarter 2024 earnings season for the S&P 500 is well underway. As of November 1st, 70% of the index has detailed their financial results with most stocks reporting actual earnings growth when compared to a year ago. Specifically, earnings growth for the third quarter was over 8% annualized when compared to last years results. If the good news on earnings growth holds, it would mark the fifth quarter in a row of actual earnings growth for the S&P 500.
Looking at performance, the S&P 500 Index fell by 0.9% in October. The blue-chip Dow Jones Industrial Average dropped by 1.3% over the month. The tech heavy NASDAQ Composite retreated by 0.5%. International stocks also posted losses with the MSCI All Country World Index of developing and developed market stocks falling 2.2% in October. The MSCI Emerging Market Index posted losses of 4.5% in October. The MSCI EAFE Index of developed international equities plummeted by 5.4% in October.
INTEREST RATES
AND GROWTH
On October 30th, third quarter U.S. GDP came in at 2.8%, below expectations, and down slightly when compared to second quarter’s 3.0% growth. The report detailed a strong and resilient U.S. consumer with personal consumption contributing a stellar 2.5% of the growth in the U.S. economy.
At this past September’s FOMC meeting the Fed released an update on their Summary of Economic Projections which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested lower inflation projections for 2024 and 2025 paired with increased unemployment projections for 2024 and 2025.
During the month of October term points on the U.S. Treasury curve moved higher, continuing a trend that started in the middle of September. Specifically, during the month of October shorter maturities saw slightly higher yield changes than longer maturities with the U.S. Treasury 2-year yield moving 53 basis points higher to 4.17% while the 10-year U.S. Treasury rose 50 basis points to 4.28%.
Mortgage Rates moved higher in October as the Freddie Mac 30-year Primary Mortgage Market Survey rose to 6.72% on October 31st, up 64 basis points from September 26th.
POLITICAL AND
REGULATORY TRENDS
The election on November 5th resulted with Donald Trump winning the Presidency and Republicans winning the Senate. In addition, the race for the House of Representatives is close with an anticipated win for Republicans as of November 8th.
INVESTMENT
TRENDS
Higher interest rates and poor equity performance for major U.S. equities was somewhat offset by continued growth in corporate earnings. Headline inflation continues to move in a downtrend with September CPI down to 2.4%; but Core inflation continues to run above target. Specifically, CPI excluding Food and Energy, or ‘Core CPI’, most recently came in at 3.3%.
Third quarter U.S. GDP report detailed a resilient and strong consumer with an expanding US economy growing at 2.8%. Finally, the most recent Summary of Economic Projections detailed an expected 2024-year end GDP of 2.0% with inflation measures above the U.S. Central Banks target of 2.0%.
Stresses on the global financial system, cooling-but-persistent inflation domestically and abroad, and geopolitical tensions continue to weigh on investor sentiment. On balance, the head-and-tail winds currently at play suggest there is a potential path for global economic growth, albeit at a slower than initially expected pace.
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