Market Insights

Negativity is plaguing the stock market as investors brace for today’s Federal Reserve meeting.

The S&P 500 fell 2 percent in October, returning to price levels from mid-May. The index has declined for three straight months, its longest losing streak since the pandemic crash in early 2020. About two-thirds of its members lost value in October, along with nine of the 11 major sectors.

Higher interest rates remained the biggest worry as economic data kept surprising to the upside. Job growth, retail sales and gross domestic product all shot past expectations. The yield on the 10-year Treasury note jumped toward a 15-year high of 5 percent.

Geopolitics and earnings were also a drag. The conflict between Israel and Hamas weighed on airlines, although crude oil still declined. Solar-energy stocks had an especially poor month as higher interest rates hurt already weakening demand.

Consumer discretionaries also tumbled, weighed down by automakers like Tesla (TSLA) and Ford Motor (F). Both reported weaker-than-expected quarterly results. TSLA declined further after supplier Panasonic reported lower demand for electric-vehicle batteries. F struggled with the United Auto Workers strike.

Gloom Bubble?

Sentiment turned sharply bearish as stocks fell, according to a pair of surveys. Separate data from TradeStation showed that fewer than 10 percent of S&P 500 members were above their 50-day moving averages last week. It was the least in more than a year, which may suggest an extreme in bearish conditions.

Wilder’s Relative Strength Index (RSI) also hit an oversold condition. Such readings sometimes indicate peaks in negativity.

Stocks could “finally break the doom loop,” this week, Tom Lee of Fundstrat said on Monday. He said key economic data like today’s Federal Reserve meeting and Friday’s non-farm payrolls could reverse the trend.

There were also some potentially encouraging headlines for investors worried about inflation and high interest rates. Last week’s GDP report showed lower-than-expected core inflation. S&P Global Market Intelligence also saw price pressures easing as manufactures prepare to boost production. Another positive came from the Treasury Department, which plans to issue slightly less debt than expected this quarter.

The Middle East remains a wild card. However calming tensions could boost stocks and potentially lower oil prices.

Chart Levels

The S&P 500 has rebounded this week but is still at levels from early June.

There are two potentially important prices to the downside. 4103 was a weekly low in late May where the index ended last week. Below that is roughly 4048, the monthly low for April and May.

TradeStation data also showed that fewer than 10 percent of S&P 500 members were above their 50-day moving averages last week. It was the fewest in over a year, which may suggest an extreme in bearish conditions. Next, Wilder’s Relative Strength Index (RSI) returned to an oversold condition.

Chart watchers are also likely to pay attention to the 10-year Treasury yield. Further declines from the 5 percent area could support equities.

Big Movers in October

Sector Watch

Key Economic Events in October

Below are some key economic events from last month.

• Mortgage Rates Hit 23-Year High Above 8%: The average rate on 30-year mortgages hit 8% for the first time since mid-2000. The increase followed a surge in Treasury yields as the government borrows more and the Federal Reserve keeps interest rates high (10/18)
• Retail Sales Beat for 3rd Straight Month: Retail sales rose 0.7% in September, more than twice the forecast amount. The increases were broad across categories. It was the third straight month that the number beat estimates. (10/17)
• GDP Beats Estimates as Prices Cool: Gross domestic product increased by 4.9% in the third quarter. It was half a percentage point more than expected. Consumer spending and private investment powered the beat. The core price index also rose less than forecast. (10/26)
• Treasury Cuts Planned Borrowing: The U.S. Treasury Department plans to borrow $776 billion in the fourth quarter. That’s $225 million less than the third quarter and slightly below Wall Street’s estimates. It could be viewed as a positive for bond prices, with the potential to lower borrowing costs. (10/30)

What Experts Are Saying

Below are some noteworthy commentaries.

• The International Monetary Fund raised its 2023 growth forecast for the U.S. economy from 1.8% to 2.1%. Its estimate for next year also increased from 1% to 1.5%. The IMF cited business investment, consumer spending and government spending. (10/10)
• Bill Ackman said “there is too much risk in the world to remain short bonds.” His Pershing Square hedge fund covered bearish positions on U.S. Treasuries first reported in August. (10/23)
• CNN observed a drop-off in demand for ESG investing. The report noted weaker fund flows and sharp declines in solar-energy stocks. Separately, automakers reduced plans for electric-vehicle production. (10/23)
• Chris Williamson, chief business economist at S&P Global Market Intelligence sees increased odds of a soft landing for the economy. He noted expected production growth and lower inflationary pressures. (10/24)
• Tom Lee of Fundstrat said the stock market could break its “doom loop” by the first Friday of November. He said the release of key economic data could ease worries about higher interest rates. (10/30)

Popular Futures Contracts in October

Newsworthy Events This Month

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