By Ben Norris, CFA, Senior Investment Strategist, Vice President
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It’s officially spooky season, and global investment markets are getting scary just in time for Halloween. Nearly every major stock index fell last week as a witch’s brew of economic and earnings data entered the cauldron. While stocks had a wicked week, bonds fared better as yields broadly fell. The 10-year U.S. Treasury yield finished the week 0.09% lower at 4.83% after getting eerily close to multi-decade highs earlier in the week. While rates are expected to remain higher for longer according to the U.S. Federal Reserve (Fed), a surging supply of Treasuries has also contributed to the move higher in yields.
Recent stock market weakness is a bit of a shock given economic resilience and a third-quarter earnings season that has offered more treats than tricks so far. With nearly 50% of the S&P 500 (SPX) reporting earnings, 77% of constituents have beaten expectations. Even more impressive is that the average earnings surprise has been 7.7%. Despite SPX companies monster-mashing earnings reports, investor reactions have been generally negative. As good as third-quarter results have been, the outlook for the fourth quarter and beyond has begun to turn rotten. Consensus expectations for fourth-quarter earnings growth have fallen from 8% to 5% over the last several weeks and are poised to get worse as earnings season progresses.
SPX had a particularly ghastly week as the index entered correction territory, falling more than 10% from its 2023 high set in July. The index lost 2.5% last week and is now up just 8.7% year-to-date. The index continues to be haunted by a lack of contribution from non-mega-cap stocks. The top five stocks by market cap have contributed 94% of SPX’s total return, while the remaining 495 stocks have ghosted investors. The Dow Jones Industrial Average was slightly better than SPX but still lost 2.1% last week and is now in negative territory year-to-date. The NASDAQ Composite and Russell 2000 suffered nearly identical fates, marking 2.6% losses. International indices fared better than their domestic counterparts last week but also saw losses across the board. The MSCI EAFE and Emerging Markets indices lost 0.8% and 0.6%, respectively. All told, investors likely felt like they were being chased by a horror movie monster last week as there were very few places to hide.
While markets have been tricky lately, economic data continues to be a surprising treat. Real GDP grew at a 4.9% annual rate in the third quarter, beating consensus expectations of a 4.5% growth rate. The greatest contributions to growth came from consumer activity, inventory accumulation and government spending. Core GDP, which consists of consumer activity, business investment and homebuilding, rose at a 3.3% annual rate. Outside of pandemic-affected quarters, this marked that fastest quarterly economic growth we’ve seen since 2014. Compared to a year ago, real GDP is now up 2.9%.
Financial media outlets were quick to tout the strength of this GDP report as a sign that the U.S. economy remains on track for a soft landing. However, this overlooks a few key notes in the report. First, business investment fell slightly during the quarter—a sign that businesses are taking defensive action in preparation for a potential slowdown. Second, the boost to growth provided by government spending is probably not sustainable given where the federal deficit is. Finally, although consumer spending has proven more resilient than many anticipated thanks to pandemic-related stimulus, the excess savings that households built over the last several years is beginning to run out.
Other economic data releases further improved vibes last week as a few key developments made it clear that the U.S. economy isn’t quite six feet under yet. Tuesday saw the U.S. manufacturing sector come back from the dead after a five-month contraction, according to U.S. Manufacturing PMI. Similarly, U.S. Services PMI indicated that services activity accelerated over the last month and remains in expansion territory. Within these reports, it also became apparent that business sentiment has improved as companies believe that interest rates should come down in the coming quarters. Elsewhere, housing and consumer sentiment data also provided support for those expecting a continuation of economic growth. Both pending and new home sales surprised to the upside despite rising mortgage rates and soaring home prices pressuring affordability. The final reading of consumer sentiment for October showed that consumers continue to feel good about their prospects, even with higher borrowing costs and lingering inflationary pressures. The U.S. is a consumer driven economy, and strong sentiment is certainly supportive of an ongoing expansion.
Rounding out last week’s economic releases, the Personal Consumption Expenditures Price (PCE) Index came in better than expected for both the headline and core numbers. Year-over-year PCE was 3.4%, essentially unchanged from the month prior and down significantly from a year prior. Core PCE came in at 3.7% and continues to show that the Fed is making slow but steady progress in warding off the haunting effects of inflation.
Looking to the week ahead, investors will once again have no shortage of catalysts with a packed week of earnings releases and economic data. Earnings reports will be in focus next week with reports from McDonald’s (MCD), Amgen (AMGN), Caterpillar (CAT), Pfizer (PFE), Allstate (ALL), Kraft Heinz (KHC), PayPal (PYPL) and Apple (AAPL). Headlining the economic calendar will be the Case-Shiller Home Price Index, Consumer Confidence, the ADP Employment Report and the ISM Manufacturing Index. The most consequential update will come on Wednesday when the Fed announces its next policy decision. Markets are anticipating a pause in interest-rate hikes so investors will be on the lookout for clues for what steps the Fed might take at their December meeting and beyond.
U.S. Economic Calendar October 30 – November 3
| Tuesday, October 31 | ||||
| Time | Release Name | For | Consensus | Prior |
| 9:00 am | S&P Case-Shiller Home Price Index | Aug. | 0.8% | 0.1% |
| 10:00 am | Consumer Confidence | Oct. | 100.0 | 103.0 |
| Wednesday, November 1 | ||||
| Time | Release Name | For | Consensus | Prior |
| 8:15 am | ADP Employment | Oct. | 130,000 | 89,000 |
| 10:00 am | ISM Manufacturing | Oct. | 49.2% | 49.0% |
| 2:00 pm | FOMC Policy Decision | |||
| Thursday, November 2 | ||||
| Time | Release Name | For | Consensus | Prior |
| 8:30 am | Initial Jobless Claims | Oct. 28 | 214,000 | 210,000 |
| 8:30 am | U.S. Productivity | Q3 | 4.3% | 3.5% |
| Friday, November 3 | ||||
| Time | Release Name | For | Consensus | Prior |
| 8:30 am | Nonfarm Payrolls | Oct. | 170,000 | 336,000 |
| 8:30 am | U.S. Unemployment Rate | Oct. | 3.8% | 3.8% |
| 9:45 am | U.S. Services PMI | Oct. | 50.9 | 50.6 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market