With the approach of the US Presidential election, some investors had been fearing a “Shocktober” for financial markets, however, October proved to be more like “Floptober”.
Stock markets were generally in the black for the month, but on Halloween equity indices flopped to red. For the month as a whole US large company stocks declined by 0.9% and small company stocks fell by 0.7%.
Quarterly earnings reports released by a few large US technology companies last week underwhelmed Wall Street analysts. Concerns about the possibility of diminished tech profits in the future spooked stocks and seemed to be one of the factors behind the fall in stock prices.
Foreign stocks were negatively impacted by a strengthening US dollar and dropped by 5.3% in October.
Despite recent weakness, though, stocks have performed very well so far this year. With two months to go in 2024, US large company stocks have returned nearly 21%, small company stocks have risen 11.5%, and foreign stocks are up by 7%.
The past month delivered more tricks than treats for bond investors, too. Intermediate- and long-term interest rates rose by about a half percentage point which translated to negative performance for bond fund investors.
The bond market situation can be confusing for some investors, especially when longer-term interest rates go up at a time when the Federal Reserve has begun to reduce its target for short-term interest rates.
Concerns about persistently wide Federal budget deficits and increasing US government debt, and the possibility of both conditions worsening under either future Republican or Democrat administrations, were factors behind rising intermediate and long-term interest rates, and poor bond performance, in October.
The performance picture is murkier for bonds going forward. Satisfactory returns from short-term bonds seem likely, because interest rate fluctuations have a lesser impact on bonds maturing on the sooner side (and bond funds which hold these securities).
However, for bonds maturing farther out in time (and bond funds that hold these securities), rising interest rates are a drag on near-term performance.
The benchmark intermediate-term US bond index fell by 2.5% in October. Year-to-date, intermediate-term bonds have registered a positive return of 1.5%.
For short-term bonds, Morningstar’s bond benchmark that tracks performance for US bonds with less than a year to maturity had a positive 0.25% return in October, and is up by nearly 5% year-to-date.
Despite softer financial markets in October, new data related to the US economy remained upbeat.
Gross Domestic Product (GDP), which quantifies the total value of all goods and services produced within a country’s borders, and therefore acts as a kind of quarterly economic “check-up”, continues to show that the US economy is in good health.
The Commerce Department reported last week that GDP rose by a 2.8% annual rate in three months ending September 30, after adjusting for inflation. That came close to the 3% growth rate in the second quarter.
While output in some areas, such as the housing market, has been lackluster, overall the US economy remains buoyant, supported by wages that continue to rise and consumers whom are willing to spend.
Here’s a snapshot of stock and bond performance for October:
US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index; Foreign Stocks = MSCI EAFE Index
-RK