Monthly Market Update – October 2024

Key Points

• STREAKS ARE OVER – October saw the end of a five-month winning streak for U.S. stocks, an end to a five-month streak of declines for U.S. Treasury yields, and interrupted a three-month streak of declines for the U.S. Dollar Index.
• ZOMBIES VANISHING – U.S. corporations have demonstrated resilience amidst rising interest rates, with the number of corporate “zombies”—businesses struggling to cover debt obligations—significantly decreasing to five-year lows.
• INSIDERS EXHIBIT CAUTION – Despite big gains for the S&P 500 this year, insider trading data reveals low levels of net buying among U.S. corporate officers and directors. Even notable corporate insiders such as Warren Buffett, Jeff Bezos, and Jamie Dimon are exhibiting caution in their investment holdings.
• SMALL BUSINESS UNCERTAINTY – Small businesses are experiencing a significant increase in uncertainty, with the NFIB Small Business Optimism Index reporting a record high uncertainty reading for September. This uncertainty is reflected in decreased plans for capital outlays, inventory increases, and current job openings.
• MASSIVE SPENDING – September concluded the latest federal fiscal year, and unfortunately, it presents significant financial challenges. Government spending reached $6.75 trillion, far surpassing historical revenue norms. This has exacerbated the national debt, now $35.8 trillion, and led to unprecedented net interest payments. 
• SEASONALITY SWEET SPOT – Historically, October is the worst month of the year in an election year and has been negative for the last five election years. But November has tended to be the best month of an election year. November also kicks off both the best 3 month and best 6 month seasonal periods.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of October 31, 2024. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

For much of the month of October, it looked like the stock market would extend its monthly winning streak to six months as solid economic data, moderating inflation, and decent third-quarter earnings reports kept investors buying. The S&P 500 Index even added several all-time closing highs in the first half of the month. However, stocks began to lose momentum in the back half of the month when U.S. Treasury yields started to ascend to their highest levels since mid-summer. In particular, the September Consumer Price Index (CPI) report indicated that inflation eased, but by less than expected. Headline CPI rose by +2.4% year-over-year, which was the slowest annual increase since early 2021, but Core CPI, which strips out food and energy prices, remained elevated at +3.3%. Markets began to reduce rate cut expectations by the Federal Reserve (the Fed), and eventually, the 2-year and 10-year Treasury yields pushed above 4.0%. In addition, presidential candidate Donald Trump began to climb in the polls, which also coincided with the move higher in yields, which was generally interpreted as an increased probability in pro-growth fiscal and regulatory policies. With that as the background, the final two sessions of the month essentially wiped out all of the stock market’s gains. The S&P 500 Index ended October down -1.0% (-0.9% with dividends added back), just the second down month in 2024 so far. In fact, as the chart above shows, virtually all major asset classes ended the month down. The Russell 2000 Index, an index of small capitalization stocks, was down -1.4% on a total return basis. 

Overseas stocks suffered even more as the U.S. Dollar Index had its biggest monthly gain since September 2022, a +2.94% rise. That ended three months of declines. A rising U.S. dollar is a headwind for non-U.S. assets. Developed market international stocks (as measured by the MSCI EAFE Index) fell -5.4% in October, and unlike U.S. stocks, they started negative and slid further into the red as the month progressed. In Europe, October brought a pickup in inflation, and the European Central Bank (ECB) acknowledged signs of weakening economic momentum in Europe. The ECB did deliver a third -25 basis point rate cut, which was in line with expectations. Germany, Europe’s largest economy, continued to struggle, particularly in the manufacturing sector, and led the MSCI Europe ex UK Index to a -6.0% monthly decline. In Asia, the Bank of Japan (BoJ) held interest rates steady, as expected, but did strike a hawkish tone at its October meeting. In addition, the government’s ruling coalition suffered a loss in their election, which could introduce a period of political instability. Nevertheless, the MSCI Japan index fell less than other developed international markets, losing -3.9% in U.S. dollar terms. The MSCI Emerging Markets Index did better than developed markets but still fell -4.3%, ending nine months of positive returns – the longest streak since October 2017.

As stated upfront, it was really the bond market that stole the spotlight from stocks in October. Despite central banks across the globe delivering more rate cuts, bond yields continued to rise. Again, the bulk of the move coincided with a rise in long-term inflation expectations and alongside continued evidence of a still-resilient economy. The benchmark 10-year U.S. Treasury yield topped 4.30% on October 30 for the first time since late July. That pushed U.S. bonds returns down for the first time in six months. The Bloomberg US Aggregate Bond Index fell -2.5% for the month, ending the longest streak of positive monthly gains since 2019. Non-U.S. bonds were hit even harder with the U.S. dollar strength, dropping -4.1% for the month, their worst monthly loss since September 2022. 

Of course, throughout the month, the presidential election hung in the background and saturated the airwaves. Any market news and economic data was difficult to interpret without consideration to all the political machinations and implications. Markets ultimately thirst for clarity, and election uncertainty appeared to weigh on the market this October. But that isn’t unusual, the S&P 500 has now declined in the month of October in each of the last five presidential election years. And true to form, when clarity was largely delivered with a surprisingly quick and decisive outcome on this election, risk assets soared. Before the markets opened on Wednesday morning, November 6th, it was clear that Republicans would regain the White House and the Senate, and prediction markets point to them retaining the House as well. U.S. stocks raced to new all-time highs on the prospects of a Trump administration pro-growth, low tax, and deregulatory agenda. The S&P 500 was up +2.5% on Wednesday, November 6th and the small cap Russell 2000 jumped +5.8% for the biggest post-election day gains in modern history. As of the close on Friday, November 8, the S&P was already up +5.1% for November, and the Russell was up +9.2% month-to-date, already offsetting the modest October losses several fold. Bond yields initially jumped on the election outcome, but the 10-year U.S. Treasury yield ended November 8th near the levels it started the month. The Bloomberg U.S. Aggregate Bond Index was up +0.3% for the month of November as we went to publication. 

Source: Bloomberg. Data as of October 31, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

STREAKS ARE OVER

The U.S. stock market experienced a downturn as October concluded, bringing an end to the S&P 500’s five-month winning streak. Mega cap tech leaders that reported earnings in the final week of the month posted mixed results, and weakness in some of their stocks contributed to the market’s end-of-month decline. Significant declines in artificial intelligence (AI) darlings such as Microsoft and Meta Platforms on the last day of October cemented the break of the S&P 500’s monthly streak. Notably, U.S. Treasury yields finished higher, halting their five-month streak of declines, with the 10-year yield rising to 4.28% from 3.80% in September. Additionally, the U.S. Dollar Index experienced a substantial +3.3% increase, marking its largest monthly gain since September 2022. This ended a three month losing streak for the dollar, its longest since late 2022/early 2023.

The S&P 500 Monthly Winning Streak is Over

A Late-Month Slump Wipes Out S&P 500’s Monthly Winning Streak

Source: FactSet, The Wall Street Journal.

ZOMBIES VANISHING

U.S. large cap stocks appear to be weathering higher interest rates with ease, as the number of corporate zombies, businesses that don’t produce enough profit to service their debts, are shrinking materially. Zombie firms are now at five-year lows after rising during the 2022-23 earnings downdraft. Although interest expense is on the rise, operating income is also increasing. As a result, the interest coverage ratio now exceeds pre-pandemic levels. The healthcare sector currently has the highest number of zombies among S&P 500 sectors. Currently, just 11 companies in the S&P 500 (excluding real estate and banks) have lower trailing 12-month net income than interest payments, the smallest number since 2019. And there are 23 (excluding utilities, real estate, and financials) with lower operating income, or EBIT, than interest payments. This is above the cycle low reached in 2022 but still down from the recent peak and below the pre-crisis five-year average of 30. Operating income zombies doubled in 2022-2023 but have since dropped more than -20%, suggesting earnings strains, rather than interest payments, were likely the proximate cause of distress.

Zombies Are Vanishing to Five-Year Lows in Defiance of Rates

Percentage of Zombies in S&P 500 by Definition

Source: Bloomberg Intelligence.

INSIDERS EXHIBIT CAUTION

October’s modest losses notwithstanding, the S&P 500 is experiencing its best start of a year since 1997. But amidst the apparent enthusiasm by most stock investors, certain prominent figures in the corporate world are showcasing a notable degree of caution. Corporate insiders like Warren Buffett, Jamie Dimon, and Jeff Bezos have exhibited restraint in their investment activities lately, according to recent insider trading disclosures. Data from InsiderSentiment.com highlights a decade-low level of insider net buying, with only 15.7% of officers and directors of U.S. companies reporting net purchases in July. Many market watchers interpret such lack of enthusiasm by insiders as concern for a possible downturn in the market. Notably, Berkshire Hathaway‘s accumulation of cash under Warren Buffett’s leadership signals caution. Similarly, tech magnates like Jeff Bezos of Amazon.com and Jeff Zuckerberg of Meta Platforms (Facebook) have offloaded billions in stock this year, raising eyebrows given the buoyant market conditions. Jamie Dimon of JPMorgan Chase has also expressed concerns over global economic risks. Insider sales may be misleading as a market indicator if sales are motivated by portfolio diversification needs rather than bearish outlooks. Still, it is hard not to interpret the strategic decisions by corporate heavyweights like Berkshire Hathaway’s reduction of its Apple stake as a clear preference for cash in an arguably overvalued market. 

Corporate Insiders Are Sitting Out the 2024 Stock-Market Rally

Stock Purchases by Company Officers and Directors (first 3 quarters of each year)

Source: Washington Service, The Wall Street Journal.

SMALL BUSINESS UNCERTAINTY

Speaking of apprehension, small businesses have never been more uncertain, which appears to be constraining their spending plans. The National Federation of Independent Business (NFIB) Small Business Optimism Index, released on October 8, was relatively muted for September. But the reading on uncertainty shot up +11 points to 103, which is the highest reading ever recorded. The plans to make capital outlays fell -5 points, and plans to increase inventories fell -2 points. Also concerning, the component on current job openings fell -6 points. But the NFIB said the conclusion to the election will trigger higher spending plans, and small businesses are already showing expectations for sales to improve, with the component measuring real sales to grow rising by +9 points.

Small Businesses Have Never Been More Uncertain

Sum of “Don’t Know” and “Uncertain” Answers on 6 Questions

Source: National Federation of Independent Business, MarketWatch.

MASSIVE SPENDING

The conclusion of the federal fiscal year 2024 highlights a series of financial challenges and opportunities for reflection on government spending, deficits, and debt management. Over the course of the federal fiscal year, which ends in September, government expenditures soared to an unprecedented $6.75 trillion. To put this into perspective, even by liquidating the collective wealth of the Forbes 400 richest individuals, amounting to $5.4 trillion in 2024, the government could only finance its operations for slightly over nine months. Historically, since 1950, government revenues have averaged 17.3% of the Gross Domestic Product (GDP). Meanwhile, government spending has averaged 20.0% of GDP, reaching a peak of 31.1% in 2020. In stark contrast, fiscal year 2024 witnessed government revenues at 17.6% of GDP, yet spending increased significantly to 24.2% of GDP, surpassing traditional norms. The accumulation of annual deficits has substantially contributed to the swelling national debt, which has reached a formidable $35.8 trillion. A particular area of concern is the government’s ability to manage the associated interest payments on this burgeoning debt. Fiscal year 2024 recorded net interest payments at an all-time high of $881.65 billion. Elevated interest rates, coupled with the government’s continuing cycle of incurring new debt and refinancing existing obligations at higher costs, suggest a trajectory of increasing financial burden. This fiscal year, net interest payments have averaged 3.1% of GDP, reflecting a doubling from 2021’s 1.5% of GDP. Given these developments, it is crucial for policymakers to consider strategic adjustments to ensure fiscal sustainability and economic stability in the years ahead.

It’s a Spending Problem Not a Revenue Problem

U.S. Federal Spending versus Revenues

Note: Annual data 1950-2023, dashed lines are the average. 2024 data points represent OMB estimates.
Source: The Office of Management and Budget (OMB), First Trust Advisors.

SEASONALITY SWEET SPOT

Historically, October is the worst month of the year in an election year and has been negative for the last five election years. In that context, losing -1%, which was almost entirely due to the last day of the month, isn’t a major surprise. And it is also important to look forward to the strength November typically brings. November has tended to be the best month of an election year. Data analysis by Carson Investment Research shows that November has averaged the highest monthly return in election years since 1950 and has been positive 61% of the time. And beyond being an election year, we are also in a seasonality sweet spot. These next three months are seasonally the best three months of the year for stocks. And November also kicks off the best six months of the year seasonal pattern. Carson also notes that 2024 is one of the better first 10 months ever for stocks. When the S&P 500 is up more than +17.5% year to date going into November, as it is in 2024, returns for the rest of the year have been higher in November 12 of 14 times and up in December 11 of 14 times. It has never been lower for the combined final two months of the year. There are no guarantees in life, but with the market already reacting very positively to a pro-growth election outcome and strong seasonal tailwinds just beginning, the prospects for the remainder of the year appear favorable.

A Lower October Is Normal, But So Is a Strong November in an Election Year

S&P 500 Monthly Performance in Election Years, 1950 – 2023

Source: FactSet, Carson Investment Research.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.