Equity markets continued their recent rebound last week with the S&P 500 Index now up 15% in 2023 and the tech-heavy NASDAQ index up 32% after having its best day on Friday since May. Additionally, investors have been positioning themselves for a year-end rally as hedge fund and money manager shorts against the S&P 500 are at their lowest levels since March. (Source: The Wall Street Journal)
Bond yields rose sharply last week, with nearly all Treasury yields across various maturities surpassing the 5% mark before moderating later in the week. Even though Federal Reserve Chair Jerome Powell indicated a pause in rate hikes for November, bond investors are looking ahead. Last week's remarks by Powell about inflation remaining elevated and the possibility of more rate hikes if economic data remains robust led to an uptick in rates. (Source: The Wall Street Journal)
The threat of instability in the Middle East remains elevated as Israel responds to last week's Hamas invasion. On the investment front, it is yet another variable in an already convoluted economic backdrop of elevated interest rates, stubborn inflation, and the ongoing Russia/Ukraine conflict. Investors flocked-to-safety last week as government bonds, the U.S. dollar, and gold all rallied. The demand for Treasuries provided some relief from the recent spike in interest rates, with the 10-Year Treasury yield settling at 4.63% to end the week. Additionally, oil jumped 4% on concerns of global supply shock, but has since given back some of those gains. (Source: Edward Jones)
Congress struck a deal on Saturday to avoid a government shutdown that would have gone into effect as the clock struck midnight, securing funding through mid-November. Concessions were made on both sides as House speaker Kevin McCarthy ultimately broke with his conservative wing to move forward without strict new border policies in the legislation, while democrats sacrificed $6 billion in aid for Kyiv. Republicans insist any new funding for Ukraine, which Democrats vow to pursue in a supplemental bill in the coming weeks, must be tied to new border policies and funding. (Source: The Wall Street Journal)
While segments of the U.S. economy are showing signs of stress, such as the real estate market, on the whole the economy continues to defy gravity. Case-in-point, the ISM Services Index jumped to 54.5% last week (any value over 50% indicates expansion), delivering the eighth straight month of gains in the service sector and crushing economist's expectations of 52.5%. The U.S. consumer continues to spend on services despite high interest rates, growing debt levels, and depleted savings. (Source: MarketWatch) The Treasury yield curve has been inverted since July 2022. Historically, yield curve inversions have coincided with eight of the past ten recessions, yet the heavily anticipated 2023 recession has yet to arrive. Since July of this year, when the spread on 2-year and 10-year Treasuries reached a level not seen since 1981 (-1.08%), the yield curve has been steepening. This is welcome news, as stronger-than-expected economic growth data has driven longer-term yields higher. However, the yield curve remains inverted as 2-year Treasuries are yielding 4.98% while 10-year Treasuries offered 4.26% as of Friday's close. (Source: The Wall Street Journal)
Geopolitics took center stage last week as a Russian-hired, 25,000-troop mercenary force known as the Wagner Group embarked on Moscow after tensions grew between Putin and Wagner's leader, Yevgeny Prigozhin. The Wagner Group seized the Russian city of Rostov-on-Don and shot down six Russian helicopters on their path towards Moscow before an agreement was reached. The incident heightens concern of instability in Russia and raises questions whether the highly effective Wagner Group will continue fighting alongside Russian troops in Ukraine. (Source: The Wall Street Journal)
Weekly Market Review Jerome Powell and the Federal Reserve paused the most aggressive rate hiking cycle in 50 years last week following continued improvement from May's inflation report; headline CPI is at a two-year low (4%) while core CPI, which excludes volatile energy and food prices, fell to its lowest level since November 2021. However, further rate hikes in 2023 are not out of the question; of the 18 fed officials surveyed, the median estimate was that rates would need to rise between 5.5% and 5.75% this year, suggesting two additional 0.25% rate hikes this year. (Source: Edward Jones)
Equities advanced last week on optimism of a potential debt-ceiling agreement, leading to the S&P 500 Index returning just under 10% so far in 2023. Despite a near-double digit return from the S&P 500 Index, the S&P 500 Equal Weight Index has returned just 1.7% this year. Why the difference? This year's stock market performance has been primarily driven by a narrow segment of mega-cap tech companies, who most recently have benefited from the hype around artificial intelligence. The top ten companies in the S&P 500 Index, seven of which are tech companies, currently make up over 30% of the index. (Source: TDAmeritrade)
