Weekly Market Update for October 20, 2023

by Jim Ulland

Fed Chairman Powell implied on Thursday that the Fed is through raising interest rates. Other Regional Presidents have echoed the same message in their public remarks. Interest rates, as reflected in the commonly cited 10-year US Treasury yield, are at a 16-year high. 30-year mortgage rates are at a 23-year high.

Normally, the market would have seen Powell’s remarks as a reason to spike higher. That was not to be. The fear persists that the full impact of higher rates is not known and could push the surprisingly resilient economy into recession. The second major force preventing a market rally is the expansion of international conflict. The war in Ukraine continues for its second year. Also, an escalation in Israel’s reaction to Hamas’s brutal attack is expected. Both conflicts have unsettled the markets. For instance, Crude oil (WTI), is up 7.9% since Hamas attacked Israel. Iran is threatening to enter the conflict. Hezbollah, perched on Israel’s northern border, already has been skirmishing with Israeli forces. Higher oil prices give Iran more money to fund terrorist groups and Russia more money to buy weapons. International trade restrictions have resurfaced. The latest example is the US Government’s restriction on the export to China of some AI chips, including some from portfolio company NVIDIA. This stress on the world economy will not end soon.

Against this backdrop, stocks and fixed income prices have fallen. However, corporate earnings for Q3 have been surprisingly better than expected and up from a year ago on average. Large banks have put the interest rate trauma behind them, although the results are more mixed in regional banks. Unemployment filings have remained low. Retail sales in September were up a surprising 0.7% from August. Workers are returning to the office in increasing numbers. And GM is rumored to be near an agreement with the UAW.

Inflation continues to trend down, and that trend seems to be the pathway to a stronger fixed income and equity market. Core prices rose 3.7% in September from the prior year. In August the rise was 3.9%. At the end of last year prices were increasing at the rate of 4.9%. But to strengthen, the market also needs a reduction in global tension. Higher-than-average market volatility is likely as these two primary issues play out. Fortunately, our fixed income strategies continue to pay their expected distributions whether the price of those securities is up or down.

For the week, the S&P 500 was down -2.39% and the NASDAQ -3.16%. On Monday the S&P 500 was +1.06%, Tuesday -0.01%, Wednesday -1.34%, Thursday -0.85%, and Friday -1.26%. The yield on the 6-month Treasury closed at 5.54%. The 10-year Treasury was up +30bps to 4.92%.

Next week, the fear of Iran entering the Israel-Hamas war and progress on hostage negotiations will dominate headlines. Q3 corporate earnings will show the amount of resilience in tech stocks (Amazon, Meta (Facebook), Google and Microsoft) as well as many of the S&P 500 companies including GM, 3M, Visa, Boston Scientific, and Exxon. With the Fed highly unlikely to raise rates at its 11/1 meeting, the direction of interest rates during the week will move the market. Our hope is for a modest decline in rates after the sharp rise this week.

The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Investors should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All investors are strongly urged to consult with their tax advisors regarding any potential investment.

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