Trends of the Season

30 October 2023

Dear clients,

Financial markets are preparing for what could be a crucial week: the Federal Reserve meeting, US employment data and technology companies' earnings. The Federal Reserve meeting, US jobs data and earnings from technology leader Apple Inc could determine the course of stocks and bonds for the rest of the year.

October lived up to its reputation as a volatile period as a sharp rise in Treasury yields and geopolitical uncertainty pressured stocks. The S&P 500 Index fell 3.5% for the month, adding to losses that left it more than 10% below its late July high.

Whether it remains as tight through the end of 2023 depends largely on the bond market. The Fed's stance on raising interest rates and growing U.S. budget problems pushed the benchmark 10-year Treasury yield, which moves inversely to prices, to 5% earlier this month, the highest since 2007. Rising Treasury yields are seen as a headwind for stocks, in part because they compete with equities for buyers. Investors fear yields could rise further if the Fed reaffirms its hawkishness at the central bank's monetary policy meeting on 1 November. Strong US jobs data next Friday could also act as a catalyst for yields if it bolsters the case for keeping rates elevated to cool the economy and prevent a rebound in inflation.

Overall, futures markets rate the probability that the Fed will not raise rates in November as nearly 80% and the likelihood that the central bank will keep rates unchanged in December, according to CME's FedWatch Tool. Still, policymakers are forecasting they will hold the key rate at current levels until the end of 2024, longer than markets had previously expected.

Investors are also awaiting Apple's results on Thursday, in an earnings season that has seen some growth and technology giants including Tesla and Google disappoint. The tech sector-focused Nasdaq 100 index is down 11% from its high, although it is up nearly 30% year-to-date.

Some investors believe the worst of the sell-off may be over. According to CFRA Research, the stock market recovery will follow seasonal trends. Since 1945, the S&P 500 Index has gained an average of 1.5% in November, making it the third best-performing month of the year.

More broadly, some argue that the stock market's performance this year indicates that the fourth quarter will see a rebound.

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