October is met by many investors with a sense of unease – one that is often merited. It is among the year’s most volatile periods with more swings of 1.0% or more than any other month going back to 1950. And, of course, there have been some notable October crashes, most memorably in 1929 and 1987. (Investopedia, October Effect, Nov 3, 2022)
But not this year. This October saw the Dow Jones Index put in its best performance since 1976, up 13.95%. The S&P returned about 8.0% and the technology heavy Nasdaq 3.9% (CNBC, Oct. 31). Volatility was true to form, however and there was a wide disparity in returns across the market with technology and their kin having significantly worse months than more defensively oriented stocks. Stocks surged to start the month with the Dow rising 2.7%, the S&P 2.6%, and the Nasdaq 2.3%. For the S&P and Nasdaq it was their best first day of any quarter since 2009 (Wall St. Journal, Oct. 3). The following day saw more gains – a 2.8% jump for the Dow, 3.1% for the S&P, and 3.3% for the Nasdaq (Wall St. Journal, Oct. 4).
The September employment report brought a reality check. The U.S. added 263,000 jobs and the unemployment rate fell to 3.5%, suggesting that labor conditions remained tight. In the current “good news is bad news” market this development was unwelcome and stocks fell on the day with the Dow off -2.1%, the S&P -2.8%, and the Nasdaq -3.8% (Wall St. Journal, Oct. 7).
The prime mover of stock market prices was the same as it has been for some time: speculation over the pace of the increase in the Federal Funds rate. Jobs have been seen as one controlling factor for the Central Bank. But the argument did shift a little in October; those voices suggesting that Fed policy has become too backward looking – and that the economy was already showing significant signs of a slowdown – grew louder.
While not all the data was on their side, some was. Job openings declined and layoffs rose slightly in August, according to the Labor Department (Wall St. Journal, Oct. 4). Mortgage rates rose to the highest level in 16 years (Bloomberg, Oct. 5) and, by month’s end, were hovering around 7.0% with the predictable impact on housing prices – they went down (Bloomberg, Oct. 26). Manufacturing slowed, with the ISM Purchasing Managers Index (PMI) falling 1.9 points in September to 50.9 as new orders and employment both declined (ISM, Oct. 3).
Backward looking or no, the Consumer Price Index (CPI) numbers remained troublesome, rising 8.2% in September CPI (annualized), including a 6.6% jump in the core numbers, which don’t count food and energy (Bloomberg, Oct. 13). The overall rate was actually down from 8.3% in August and 8.5% in July, but it was the core number that grabbed the attention of investors with the biggest increase in 40 years (Bloomberg, Oct. 13). Trading was volatile on the day, as stocks fell sharply early on only to bounce back. The S&P closed to finish up 2.6%, breaking a six-day losing streak, the Dow climbed 2.83%, and the Nasdaq rose 2.23% (Wall St. Journal, Oct. 13).
The bond market was again nothing to write home about. At mid-month, the yield on the 10-year treasury was hovering around 4.0% (Wall St. Journal, Oct. 17), the highest level since 2008. Most worrisome is that the 10-year, three-month treasury bill yield curve inverted (Bloomberg, Oct. 26), a negative sign for future growth.
Globally, there were concerns, too, some related to the strong U.S. currency and some not. Emerging markets were threatened with higher dollar denominated interest costs with as much as $86 billion in bonds coming due by the end of next year, according to Dealogic data (Wall St. Journal, Oct. 5).
Troubles in the United Kingdom were largely self-inflicted as an ill-advised tax cut plan resulted in a selloff in the pound forcing the Bank of England to step in to rescue the bond market. In the event, newly appointed U.K. Treasury Chief Jeremy Hunt quickly reversed the cuts, and Prime Minister Liz Truss was shown the door, but the uncertainty lingered doing markets there little good.
Eurozone inflation hit 10.7% in October, up from 9.9% the month before and 4.1% 12 months prior (New York Times, Oct. 31).
Major economic events don’t always conform neatly to the calendar. As this is being written the Fed has just announced the fourth straight 75 basis point rise to the Fed Funds rate, bringing it to a range of 3.75% to 4%, the highest level since 2008.
As Powell gave his prepared remarks and fielded questions from the press, a market that had initially moved higher on what was perceived as a relatively positive Fed statement headed south in a big way and ended the day well below where it began. Bloomberg called it “bait and switch” – a little harsh, maybe, but not wrong. A 1.0% climb in the S&P became a drop of -2.5% by market close (Bloomberg, Nov. 2) as Powell indicated that though the pace of rate hikes may slow, the terminal level of rates will likely end higher than anticipated (Bloomberg, Nov. 2).
It was an abrupt and painful reset for expectations for a Fed “pivot” and an unwelcome surprise to start November.