Current Market Observations

Equity markets proved resilient for one week and ended the year on a positive note for the week and year. The Dow Jones Industrial Average notched higher by +0.80%, the S&P 500 Index moved higher by +0.49%, and the NASDAQ moved higher by +0.32%. This was the ninth positive week for major stock indexes in 2023 and wrapped up a banner year overall for markets (see year-to-date figures immediately below). Another important data point is that 2023 marked the fourth positive year of the previous five years for the broadly followed S&P 500 Index, with only 2022 showing negative results. Also, important to note for 2023 was the positive impact on the bond market. The Bloomberg U.S. Aggregate Index (a widely followed barometer for the bond market) returned +5.53% for 2023, giving those investors counting on fixed-income returns a welcomed result. 

U.S. Economy 

As we mentioned each week last year, the U.S. Consumer remained resilient and carried the U.S. Economy for much of the year. We saw strong annual spending in travel & leisure and overall retail spending. Early reports for the 2023 holiday season show retail sales growing by +3.1% and online shopping rose by +6.3%. While these numbers were lower than in 2022, they still show robust consumer spending.  

Financial markets are already pricing in rate cuts by the Fed for 2024. One area where we are seeing moving in rates is mortgage rates, which have fallen from recent highs near 7.80% to 6.61% before any actual cuts in rates by the Fed. See Chart 1 from Valley National Financial Advisors and Y Charts showing the 30-year mortgage rate over the past year. As mortgage rates fall, the housing industry will get a boost as affordability for new or existing homes will increase for all consumers.  

Policy and Politics 

Legislators and policymakers do not return to Washington, DC, until next week. Top on their agenda will be working out a funding agreement for the U.S. Government. The current funding agreement ends on January 19, and a new budget is needed to avoid a partial government shutdown. With 2024 being a major election year, we expect lawmakers to avoid looking any worse than they already do and, therefore, avoid embarrassing events like government shutdowns. Super Tuesday (the day when the greatest number of U.S. states hold presidential primary elections) is just 63 days away! 

What to Watch 

  • U.S. Initial Claims for Unemployment Insurance for week of Dec 30, 2023, released 1/4/24. 
  • 30-year Mortgage Rate for week of Jan 4, 2024, released 1/4/24, prior 6.61% 
  • U.S. Unemployment Rate for Dec 2023, released 1/5/24, prior 3.70% 
  • U.S. Labor Force Participation Rate for Dec 2023, released 1/5/23, prior 62.80% 
  • U.S. Non-farm Payrolls MoM for Dec 2023, released 1/5/24, prior 199,000. 
  • U.S. Recession Probability for Dec 2024, released 1/5/24, prior 51.8% 

While it may be fitting for readers of The Weekly Commentary to take a victory lap after 2023’s stellar returns for stock and bond markets, we would rather readers continue to follow the data. All year in 2023, we followed the data – watching the consumer, understanding the housing market, reading employment numbers, and understanding that if Americans are working – they are spending, and consumption is critical to the U.S. economy. Long-term investors were rewarded in 2023 for sticking to their plan and understanding that consistency and patience are the key to investing and gathering long-term wealth. Wall Street prognosticators and economists waited for a recession in 2023 that never arrived. Meanwhile, cautious optimism prevailed simply by following the data. 2024 is just starting, but our advice remains the same, stay invested, stay focused, and follow the data. Happy New Year.

Current Market Observations

If it were not so close to Christmas, we would suggest we put a red stocking cap on Fed Chairman Powell and call him “Santa Claus,” given the Santa Rally we have had over the last seven weeks. Last week, we added another 3.0% to the major stock market indexes, bringing each well into double-digit territory on a year-to-date basis (see figures immediately below.) Of course, I am referencing Chairman Powell’s press conference last week after the FOMC (Federal Open Market Committee) meeting, where he reaffirmed the notion that inflation does not need to reach 2.00% for the Fed to start cutting rates. This comment gave the markets all they needed to prepare for lower rates in 2024. This will help all major market indexes, especially small capitalization stocks that rely heavily on borrowing for standard business activities. Further, in a stunning move lower, the 10-year US Treasury dropped 32 basis points on the same news to close the week at 3.91%.

U.S. Economy 

As mentioned above, the FOMC kept interest rates unchanged for the third meeting in a row, signaling the long-awaited “Fed Pivot,” meaning monetary policy moves from a tightening stance (increasing interest rates) to an accommodating stance (lowering interest rates). The Fed Funds Futures markets are pricing in rate cuts as soon as March 2024, yet the FOMC members do not see rate cuts until September 2024. Our moves in 2023 were all based on the data, particularly our call for “no recession in 2023.” We will continue to follow the data as we assess the true path of rate cuts in 2024. All parts of the U.S. economy continue to point to growth and expansion, at least into early 2024. Our thoughts are that the Fed will watch the data as well. 

Policy and Politics 

  • While Washington, DC, is closed for the holidays, we are looking to January 2024, when budget talks will need to start quickly to avoid the risk of a government shutdown. Next year remains a presidential election year, so we also expect minimal disruption from Washington so President Biden can point to the healthy U.S. economy while campaigning for reelection. 
  • Globally, we are ramping up our concerns about the Israel/Hamas War and the risks of it spreading beyond the localized region. Rockets flying between Israel and Hezbollah in Lebanon and Yemeni militants seizing shipping tankers in the Red Sea have caused enough chaos that shipping firms, including Maersk and B.P., have either paused or re-routed container and oil tankers. While there is not yet a major military escalation, the disruption in shipping and supply chain management will cause problems in the global economy. Thus far, oil, a major commodity of the Middle East, has yet to react to the problems. See Chart 1 below from Valley National Financial Advisors and Y Charts showing WTI Crude Oil and Retail Gas Prices. Both continue to fall, with the U.S. Average retail price of gasoline hitting $3.26/gallon. Petroleum is a critical component of manufacturing and transportation and a key to keeping inflation at bay. 

What to Watch 

  • U.S. Real GDP (Gross Domestic Product) Quarter over Quarter for 3rd Quarter 2023, released 12/21/23, prior +5.20% 
  • 30 Year Mortgage Rate for week of December 21, 2023, released 12/21/23, prior 6.95% 
  • U.S. Core PCE Price Index Year over Year for November 2023, released 12/22/23, prior 3.46% 
  • U.S. Index of Consumer Sentiment for December 2023, released 12/22/23, prior 69.40. 

Thus far, 2023 has rewarded the patient investor with solid gains across all major stock and bond market indexes. We have seen the economy defy all the so-called experts who predicted a recession in 2023 and instead continue to grow and expand at a healthy pace. Employment remains strong, with a national unemployment rate of 3.7%. The housing market has thrived, and 30-year fixed mortgage rates are below 7.00%. This week, we will see earnings from various companies, including Nike and Accenture. Earnings are important as they prove that companies are still making money and, therefore, employing workers. While we appreciate markets’ gains this year, we continue to watch events unfolding in the Middle East with concern. Higher interest rates are off the table, but the markets may be pricing in rate cuts sooner than reality will prove. There are seven trading days left in the year, and Santa is just a few days away. Happy Trading!

Current Market Observations

What a difference a month makes! Last month, we were lamenting the market’s shellacking it took from August – October 2023. Both stocks and bonds were negative for those three months. Fast forward to November 2023, and we see the best returns for stocks and bonds for November for the past 30 years! Last week, we saw the Dow Jones Industrial Average increase by +2.4%, the S&P 500 Index increase by +0.8%, and the NASDAQ increase by +0.4%. These gains moved each major index into double-digit returns year-to-date (see numbers immediately below). Further, the 10-year U.S. Treasury moved a stunning 25 basis points lower last week to end at 4.22% after reaching 4.98% just one month ago. Our takeaway from outsized returns like this for one month reminds us of the importance of staying invested, weathering the intermittent storms, and reaping the rewards.

US Economy 

As mentioned above, stocks and bond markets began reacting positively as the U.S. Inflation fell from the August 2022 rate of 9.1%. Chart 1 below from Valley National Financial Advisors and Y Charts shows the U.S. Inflation Rate, the S&P 500 Index, and the 10-year U.S. Treasury. Of course, bonds experienced some pullbacks, especially as thoughts of continued rate hikes seeped into the market. Still, the general movement has been lower rates since the Federal Reserve paused its interest rate tightening pattern at the July 2023 FOMC meeting.

November’s returns were predicted by inflation continuing to fall, as evidenced by the chart above showing the standard U.S. inflation rate. The Federal Reserve prefers the Core CPI, which excludes volatile food, shelter, used vehicles, and energy. Core CPI has also fallen drastically as the Fed embarked on its fast-paced interest rate hiking cycle. Chart 2 below from Valley National Financial Advisors and Y Charts show Core CPI and the 10-year U.S. Treasury. While inflation has not yet reached the Fed’s 2.00% target, we are far from the 9.1% rate we saw last year. Further, Fed Chairman Jay Powell has clearly stated that higher interest rates take time to work their way through the financial system, and this cycle of rate hikes has lasted 22 months.

Policy and Politics 

Washington remains quiet as the stop-gap budget was passed, and we will not discuss this again until January 2024. Next year is a presidential election cycle, and we will have a lot more to see and discuss as that cycle evolves. The FOMC meets next week, and we expect the message to be more like “wait and see” and “watch the data” than a message of rate cuts that some economists are predicting already. Chairman Powell has been noticeably clear in that message, and has avoided mentioning a time for future rate cuts. Watch the message next week in Chair Powell’s press conference rather than the action of the committee on rates. The U.S. economy remains healthy, and consumer spending looks strong thus far during this year’s retail holiday season.

What to Watch 

  • Monday, December 4th  
    • 4:30PM: U.S. Retail Gas Price (Prior: $3.363/gal.) 
  • Tuesday, December 5th  
    • 11:00AM: U.S. Recession Probability (Prior: 46.11%) 
  • Wednesday, December 6th  
    • 8:15AM: ADP Employment Change (Prior: 113,000) 
    • 8:15AM: ADP Median Pay YoY (Prior: 5.70%) 
  • Thursday, December 7th  
    • 8:30AM: Initial Claims for Unemployment Insurance (Prior: 218,000) 
    • 12:00PM: 30-Year Mortgage Rate (Prior: 7.22%) 
  • Friday, December 8th  
    • 8:30AM: U.S. Labor Force Participation Rate (Prior: 62.70%) 
    • 8:30AM: Nonfarm Payrolls MoM (Prior: 150,000) 
    • 8:30AM: Unemployment Rate (Prior: 3.90%) 
    • 10:00AM: Index of Consumer Sentiment (Prior: 61.30) 

Since joining Valley National Financial Advisors in August 2020, my message as Chief Investment Officer has been clear – watch the data, get invested, as your risk tolerance will allow you to stay invested. Yes, 2022 was painful, but in this year alone, we have seen both the stock and the bond markets regain much of the ground lost in 2022. November 2023 alone saw a +9.0% gain in U.S. equities. Think about those investors sitting out this market on the sidelines and realizing they just missed a +9.0% gain! Investing can be a painful business, but gathering generational wealth over generations is not painful; instead, it takes investors who are committed to their investment plan. Will December 2023 be a month to remember? We will watch the data.

Current Market Observations

Last week continued the month-long rally we have witnessed across all markets and sectors, with the Dow Jones Industrial Average adding +1.3%, the S&P 500 Index adding +1.1%, and the NASDAQ adding +1.0%. Year-to-date returns also remain healthy across all market indexes (see figures below). Small-capitalization stocks, which have been absent all year, added another +1.9% last week, bringing the year-to-date returns to +4.1%. We point this out as a needed broadening in the 2023 stock market rally to sectors beyond the “Magnificent 7” mega-cap tech stocks into small-cap and industrial names. The month-long stock market rally has been predicated on three issues: softening inflation data, positive earnings releases from U.S. corporations, and a widespread belief that the Federal Reserve is done raising interest rates. The 10-year U.S. Treasury bond closed the week at 4.47%, three basis points higher than last week’s close. 

Global Economy 

While global unrest and turmoil continue with the Russia/Ukraine and Israel/Hamas war, both conflicts remain regional and have not yet spilled over into 1) a greater European region or 2) the larger Middle East, as #1 could impact oil, natural gas, and food prices and #2 could impact oil prices. Both situations remain horrible humanitarian events and will eventually garner sufficient international pressure to resolve the conflicts. As mentioned, the impact on oil prices from either conflict has been minimal, at least since the initial spike in March 2022. Oil is a key ingredient in many industrial and consumer materials well beyond simply energy. A falling oil price goes a long way in the continued inflation fight. See Chart 1 below from Valley National Financial Advisors and Y Charts showing the price of a barrel of oil.

Global and US Policy and Politics 

U.S. politics have reached their yearly quiet period where lawmakers, having passed budget resolutions until early 2024, return to their home states and families for the holidays. Politics are not so sanguine in China, where profit growth is slowing in their industrial sector even as greater housing stimulus continues. According to the Chinese National Bureau of Statistics, industrial profits increased by +2.7% in October from 2022, versus increases of +11.9% in September and +17.2% in August. China is the world’s second-largest economy and remains important to the U.S. and elsewhere.

What to Watch 

  • U.S. Real GDP (Gross Domestic Product) QoQ (Quarter Over Quarter) for Q3 2023, released 11/29, prior rate 4.9% 
  • U.S. Core PCE (Personal Consumption Expenditure) Price Index YoY (Year Over Year) for October 2023, released 11/30, prior rate 3.68% 
  • U.S. PCE Price Index YoY for October 2023, released 11/30, prior rate 3.44% 
  • U.S. Initial Claims for Unemployment for week of 11/25/23, released 11/30, prior 209,000.

We had a quiet, holiday-shortened week last week, but the markets continued their November rally with all major sectors participating. Early thoughts from retailers are that Black Friday sales were strong, and early Cyber Monday sales look to be strong as well. Is this the start of the “Santa Claus Rally?” As readers of The Weekly Commentary know, we do not invest in short-term rallies or bank on Santa Claus for market returns. We preach the importance of long-term investing, ignoring the noise from Wall Street, and sticking to your investment plan; any help from Santa is just gravy for investors. There are few

Current Market Observations

We will talk about market headwinds and tailwinds later in the report, but for now, let us just talk about what the markets did last week and year-to-date to remind investors where we really are and what the markets have done. Last week, the Dow Jones Industrial Average added +0.7%, the S&P 500 Index notched a +1.3% return, and the NASDAQ added +2.4%. These returns pushed year-to-date figures higher for each major index, with the Dow at +5.3%, the S&P 500 at +16.6%, and the mega-tech heavy NASDAQ at 32.8%. Certainly, few investors own only index-based investments or only mega-tech equities. Still, most investors with balanced portfolios own a slice of each and, therefore, have captured their risk-related slice of these market returns thus far in 2023. Bonds moved little last week, with the 10-year U.S. Treasury closing at 4.62%, five basis points higher than the previous week.

Global Economy 

There continues to be sufficient geopolitical global turmoil to worry us at Valley National Financial Advisors. The Israeli/Hamas War shows no signs of abating, while the Russia/Ukraine War has dragged on for almost two years; both wars are overheating the already unsteady markets for oil, natural gas, and some food commodities like wheat and creating an ongoing humanitarian crisis. On the flip side of bad news, Chinese President Xi Jinping will meet with President Biden this week in California in a move that officials on both sides hope will ease tensions in the important bilateral relationship between the U.S. and China. While these three events seem distant from the U.S. equity markets, they individually and collectively add uncertainty to the markets, which everyone who reads The Weekly Commentary knows we hate.

Policy and Politics 

In the continuing saga of Washington, DC’s version of “The Gang That Couldn’t Shoot Straight,” we are three days away from another government shutdown. The newly elected Speaker of the House, Mike Johnson, must bring together the contentious parties from both sides of the aisle to pass a budget bill before Friday, November 17, to avoid a government shutdown. While a lot of the actions and bargaining going on in Washington are in partisan brinkmanship, the farce of a looming U.S. Government shutdown has real market implications. For example, last week, the credit rating agency Moody’s lowered the outlook on the U.S. Credit to “negative” from stable, citing large fiscal deficits and declining debt affordability. Moody’s move followed a rating downgrade by another rating agency, Fitch, to A.A. from AAA earlier this year. Although the actions by rating agencies do not have any real market implications, as U.S. Treasury bonds still represent the “risk-free” market measure, moves like this slowly chip away at investor confidence and place a finer negative global spotlight on the U.S. 

What to Watch 

  • Monday, November 13th  
    • 4:30PM: Retail Gas Price (Prior: $3.52/gal.) 
  • Tuesday, November 14th  
    • 8:30AM: U.S. Consumer Price Index MoM/YoY (Priors: 0.40% | 3.70%) 
    • 8:30AM: U.S. Core Consumer Price Index MoM/YoY (Priors: 0.32% | 4.13%) 
  • Thursday, November 16th  
    • 8:30AM: Initial Claims for Unemployment Insurance (Prior: 217,000) 
    • 10:00AM: NAHB/Wells Fargo U.S. Housing Market Index (Prior: 40.00) 
    • 12:00PM: 30-Year Mortgage Rate (Prior: 7.50%) 
  • Friday, November 17th  
    • 8:30AM: U.S. Building Permits (Prior: 1.473M) 
    • 8:30AM: U.S. Building Permits MoM (Month Over Month) (Prior: -4.41%) 
    • 8:30AM: U.S. Housing Starts (Prior: 1.358M) 
    • 8:30AM: U.S. Housing Starts MoM (Prior: 7.01%) 

We have focused on quite a few negative notions this week, which we know is a bit out of character, but there are plenty of positive things to highlight. Contrary to most economists, the U.S. has avoided a recession in 2023, and it looks like 2024 will continue our growth pattern, at least into the first half of the year. Further, inflation has come down from 9% to 3% in just over a year, which means the Fed and most other global central banks are nearing completion in their interest rate hiking cycle. Corporate earnings remain healthy, with most companies reporting earnings that beat Wall Street expectations. Lastly, while the consumer may be getting understandably tired of supporting the economy with their spending, we expect consumer spending to continue well into 2024, especially during the 2023 holiday season. The markets are efficient and always look well into the future rather than watching the past. Investors would do well to do the same. Reach out to your financial advisor at Valley National Financial Advisors for help or questions.

The Numbers & “Heat Map”

Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five- and 10- year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Mortgage Bankers Association.

MARKET HEAT MAP

The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade key economic conditions that we believe are of particular importance to investors.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

Current Market Observations

Oh, what a difference a week makes! Last week, you could read the financial press and see phrases like: “Sinking Stocks,” “Correction Territory,” and “The Bear Market is Here.” And then this week, we hear Fed Chairman Jay Powell repeat his previous month’s “We are going to listen to the data, but we are pausing rate hikes at this time.” Throw in a jobs number that showed hiring in the U.S. slowed a bit in September, and the stock market is off to the races with the largest one-week rally in 2023. See the weekly data below that shows each major market index returning 5%+ for the week, and even the oft-forgotten Russell 2000 Index of Small Cap stocks returned a positive +7.6%. Here at Valley National Financial Advisors, we have been cautiously optimistic all year by following the data and realizing there was too much good news and positive momentum to permit a recession in 2023. It seems the other economists, market prognosticators, and even the market itself have finally realized it, too. The 10-year U.S. Treasury closed the week at 4.57%, 27 basis points lower than the previous week.

Global Economy 

On Wednesday, the FOMC (Federal Open Market Committee) announced that it would be keeping rates at a 22-year high of 5.25-5.50% until at least their next meeting. However, economic data released on Friday surrounding nonfarm payrolls and unemployment suggest a cooling economy and that the Fed could be tightening in the near future. Nonfarm payrolls increased by 150,000 last month, less than expected, following a downwardly revised advance of 297,000 in September, according to the BLS (Bureau of Labor Statistics). Additionally, the unemployment rate climbed to 3.9% in October from 3.8% in September. Chart 1 below shows the last two years of month-over-month changes in payrolls and unemployment rate. Chart 2 shows actual data versus the median estimates.  

$69 billion of cheap and free debt issued during the pandemic is coming due within the next three years. During 2021, $58 billion of zero-coupon convertible bonds were issued, which was an increase of 1,100% over the two years prior. The need to refinance these bonds in a high-interest rate environment could pose a significant challenge to growth companies with low levels of cash generation. Chart 3 shows sales of zero-coupon convertible bonds since 2017. Chart 4 shows the maturation schedule of these debt obligations through 2029, and Chart 5 shows which companies had the largest issues.  

What to Watch 

  • Monday, November 6th  
    • 4:30PM: Retail Gas Price (Prior: $3.60/gal.) 
  • Tuesday, November 7th  
    • 3:00PM: Consumer Credit Outstanding MoM (Prior: -$15.63B) 
  • Thursday, November 9th  
    • 8:30AM: Initial Claims for Unemployment Insurance (Prior: 217,000) 
    • 12:00PM: 30 Year Mortgage Rate (Prior: 7.76%) 
  • Friday, November 10th  
    • 10:00AM: Index of Consumer Sentiment (Prior: 63.80) 

Certainly, last week was a good week for stocks and bonds, as both rallied significantly. We know one week does not make a year, but the news from the labor department showing slowing job growth was well received by investors. Perhaps the Fed is done raising rates, but one more 0.25% rate hike will not matter as much in the grand scheme of things anyway, and we have seen the economy easily absorb 550 basis points of rate hikes. The movement in the 10-year US Treasury (see above) was impressive, and clearly, the big money has already moved in favor of lower interest rates from here. November tends to be one of the best months for equities (just behind April), and Wall Street loves a December Santa Claus Rally as traders scramble for year-end performance. We will remain cautiously optimistic and follow the data because data is not emotional, but investors are. Please reach out to your financial advisor at Valley National Financial Advisors for help or questions.

Current Market Observations

U.S. Equity markets were battered again last week across all sectors, even in the face of strong economic data released that showed 3rd quarter GDP rose +4.90%. Weak and mixed earnings reports and continued global turmoil weighed more heavily on the markets than a strong GDP report. For the week, the Dow Jones Industrial Average fell -2.1%, the S&P 500 Index dropped -2.5% and the NASDAQ fell -2.62%. Meanwhile, the 10-year U.S. Treasury bond yield fell nine basis points to close the week at 4.84% as several large investment houses either lifted their short trade on treasuries or recommended an outright buy for the sector. Both moves rallied bond prices.

US Economy 

As mentioned above, the 3rd quarter U.S. GDP was released last week and showed that the U.S. economy grew by 4.90%, which was more than double the 2nd quarter rate and led by consumer spending on Travel & Leisure and Retail Goods & Services. The economy has been bolstered by a strong labor market and consumer savings accumulated during the pandemic. See Chart 1 below from Valley National Financial Advisors and Y Charts below showing the U.S. GDP and S&P 500 Index since 1950. We purposely picked an exceptionally long-dated chart to show why it is important to think about investing over extended periods rather than over very volatile short periods of time. You will see from the chart that, over time, the S&P 500 Index grows with the U.S. economy, and we continue to believe that the U.S. economy has a long way to go from here, especially over an extended period. Remember, time is an investor’s partner, not their enemy, and it is easy to get caught up in the volatile short-term noise and miss the big picture.

This week, we will look at the latest FOMC report after their two-day meeting ends on November first. Futures markets and traders are currently pricing in another “pause” in interest rate movements, which would be welcomed, but alone not enough to move markets higher. However, if that announcement is paired with a more dovish statement or language akin to “we believe the current interest rate levels are sufficient to combat inflation,” we could see the fear leave the markets to be replaced by positive investor sentiment.

Policy and Politics 

Last week, we emphasized our concerns impacting markets: global regional turmoilfear of the Fed continuing to raise interest rates and uncertainty related to our political spectrum. With the election of Congressman Mike Johnson (R-LA) as U.S. Speaker of the House, the political sideshow and uncertainly related to it has been lifted, and Washington (rightly or wrongly) can now get back to work with focus on a spending bill that avoids another embarrassing government shutdown. 

What to Watch 

  • Target Fed Funds Rate from the FOMC meeting, released 11/1/23; current upper limit 5.50% 
  • U.S. Initial Claims for Unemployment Insurance for week of 10/28/23, released 11/2/23, prior 210,000 new claims. 
  • U.S. Unemployment Rate for October 2023, released 11/3/23, prior rate 3.8% 

Certainly, the economy continues to grow at a healthy pace despite interest rates rising from 0.00% to 5.50%. However, we are seeing sanguine earnings releases from companies and, along with that, language from CEOs and CFOs pointing to less-than-stellar earnings going forward. We stated before that interest rate hikes take time to work through the economy (typically 9-18 months). The first-rate hike in this cycle was in March 2022, about 18 months ago. We believe the FOMC is close to being finished with rate hikes as inflation continues to creep towards their 2% target (the September 2023 rate was 3.7%). As usual, watch for dovish (lower rates) or pivot (hike to cuts) language from Fed Chairman Jay Powell during the press conference after the FOMC meeting and announcement this Wednesday. We understand there is a lot of conflicting data: a growing economy, healthy consumer spending, strong labor market, less than stellar earnings, high-interest rates hurting the real estate market, and, of course, all equity markets continuing to sell off each week. Sometimes, it is not easy to be an investor. Please reach out to your financial advisor at Valley National Financial Advisors for questions or help.

Current Market Observations

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. 

Global Economy 

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. 

Current Market Observations

The broader markets rallied last week, seeing through the noise of continued inflation concerns, a protracted war in the Middle East, and mixed third-quarter corporate earnings releases. Last week, the Dow Jones Industrial Average and the S&P 500 Index moved +0.79% and +0.45%, respectively, while the NASDAQ moved lower by –0.18%. In a classic “Flight-to-Quality” trade, U.S. Treasury bond yields fell as investors moved to safe Treasuries during a time of global conflict. The 10-year U.S. Treasury bond fell 15 basis points, ending the week at 4.63%. Even at this lower yield, investors are finally seeing “real” yields on Treasuries as the U.S. Inflation Rate has finally fallen lower than the 10-year U.S. Treasury bond yield. See Chart 1 from Valley National Financial Advisors and Y Charts. 

US Economy 

As mentioned above, while stubbornly staying above the Fed’s target rate of 2%, the U.S. Inflation Rate is now 3.70% (released last week). The U.S. Core CPI (Consumer Price Index) fell to 4.13% in September 2023 from 4.39% in August 2023. Chart 1 below shows the 10-year U.S. Treasury and two inflation measures. While inflation remains higher, the yield on the 10-year Treasury is slightly higher, thereby finally offering investors real, after-inflation returns. 

Higher interest rates continue to negatively impact growth stocks as those companies typically borrow money to expand operations or hire additional employees. As third-quarter earnings releases hit the tape, we will get a better picture of which firms and industries are best dealing with higher interest rates for longer. Large banks Citigroup, JP Morgan, and Wells Fargo all reported earnings better than expected as higher interest rates helped these banks as they continue to remain a bit stingy in passing on the higher rates to their depositors. 

A widening or global escalation of the Israel-Palestinian conflict could impact oil prices, but thus far, world oil prices have not been materially impacted. It is important to watch this event to see how various actors on the world stage choose sides. For example, the U.S. has moved the USS Gerald Ford carrier fleet to the region to support Israel. Of course, defense stocks (ex. Northrop Grumman, General Dynamics & Lockheed Martin) have modestly rallied because of the growing conflict.  

Policy and Politics 

Three government forces are working in the economy right now, and all are impacting the markets, pushing uncertainty and worry into prices:

  1. We have the Fed and its constant fight against inflation. Last week, Federal Reserve Bank Vice Chairman Philip Jefferson noted that higher long bond yields are doing a lot of the work for the Fed in slowing the economy, implying that there is no need for further rate hikes.
  2. U.S. Secretary of State Anthony Blinken is actively involved in the Israeli-Palestinian conflict, which clearly indicates the U.S. is willing to do whatever is necessary to support our allies in the region.
  3. We continue to see a circus in Washington, DC, as lawmakers fall over each other trying to elect a new U.S. Speaker of the House.

Taken together, these government forces are adding uncertainty and worry to the markets, which is quite the opposite of what we expect and desire from our leaders. 

What to Watch 

• U.S. Retail Gas Price for week of October 13, 2023, released 10/16/23, prior price $3.81/gallon.
• U.S. Housing Starts for September 2023, released 10/18/23, prior 1.283 million starts.
• U.S. Initial Claims for Unemployment for week of October 14, 2023, release 10/19/12, prior 209k
• 30 Year Mortgage Rate as of October 19, 2023, released 10/19/23, prior 7.57%
• Key Earnings releases to watch this week: Tesla, Netflix, Goldman Sachs, Lockheed Martin.

We pointed out the wall of worry above with confusion on interest rates, continuing global conflict, and a broken U.S. Congress. Meanwhile, the markets are moving slightly higher each week, and bonds finally offer “real” yields for investors. Instead of worrying about what is happening now, the markets are scaling the wall of worry and moving higher as they filter out the noise and see sectors like big tech, healthcare, and mega banks doing well, even given all the noise. It is easy to get mired down with worry and negativity – that is all we see on TV and hear from so-called experts, but the markets see the future and ignore the noise. Investors interested in creating long-term generational wealth should listen to the markets and ignore the TV. Reach out to your financial adviser at Valley National Financial Advisors for advice or questions.