Weekly Market Commentary - Oct 30th, 2023

Volatility picked up as stocks retreated on growth fears, though solid economic data and a Fed pause signal provided glimmers of optimism. Treasury yields stabilized while small caps lagged largely, and sentiment soured amid renewed concerns over corporate health and central bank policy, though upbeat consumer data lent some support.

Recession Fears Resurface 

The S&P 500 entered a correction, dropping over 10% from its high back in July as growth fears intensified. Small caps underperformed large, with the Russell 2000 hitting its lowest level in almost three years, falling 2.6% on the week. 

While earnings were mixed, revenue misses hinted at fading pricing power as inflation cools. This may spark worries over profit growth in 2023.

Fed Remains in Focus

Treasury yields stabilized with the policy-sensitive 10-year holding below 5% after spiking to 15-year highs last week. 

September PCE inflation met expectations, supporting the case for an unchanged Fed funds rate at the next FOMC meeting in November – but personal spending accelerated even as savings declined, pointing to unstable economic fundamentals ahead of future hikes.

Upbeat Consumer Data 

The October UMich consumer sentiment survey came in better than forecast, buoyed by hopes of moderating inflation.

PMI increased to a 3-month high in October on improved outlooks for growth and price pressures, and stronger household activity and sentiment could lift stagnating spending and cushion the impact of higher rates.

A tug-of-war between lingering growth fears and stabilizing yields left most assets in the red for the week. But under the surface, opportunities seem to be emerging.

Equities

• The Dow dropped over 2% as growth fears overshadowed positive tech earnings from Amazon and Intel.  
• Defensive sectors held up best while rate-sensitive financials and real estate languished. Energy also lagged crude’s slide.
• Ongoing divergence between mega-cap tech leaders and the broader indexes continues to widen. This may produce opportunities. 

Bonds  

• Shorter-term yields dipped modestly while longer-dated Treasuries were effectively unchanged week-over-week. 
• The benchmark 10-year yield closed Friday around 4.84%, holding below the psychologically important 5% level.
• Investment-grade corporate bonds saw marginal relief, though credit markets remain under pressure given economic uncertainty.

Commodities

• A surge in the dollar weighed on most commodity prices through the week. 
• Oil prices tumbled over 5% to under $85/barrel as demand concerns flared while gold slipped near $1650/ounce. 
• Natural gas bucked the downtrend, jumping over 7% to above $6/MMBtu on weather-related supply risks. 

Forex

• The US dollar index powered to its highest level since 2002, gaining over 1% on the week.
• The Greenback’s strength reflects ongoing haven demand amid global growth fears and rising domestic interest rates.
• The euro slumped to parity, and the British pound approached 1.10 as monetary policy divergence weighed on European currencies.

With risks swirling, avoiding complacency and overconfidence is key. But behind the scenes, opportunities seem to be brewing.

For Conservative Portfolios

• The stabilization in Treasury yields could offer a chance to selectively extend duration, capitalizing on higher income potential. 
• Dividend stocks remain attractive for income given discounted valuations. Focus on firms with strong fundamentals able to sustain payout growth.
• Moderating inflation data supports fixed income allocation for diversification. Shorter-term high-quality bonds could provide stability if yields rebound.

For Growth Portfolios

• Megacap technology leaders continue seeing positive earnings momentum during a volatile stretch for markets. Remaining overweight growth seems appropriate.
• Small caps could be poised for a relief rally if recession fears ease. Scaling into depressed valuations may pay off when sentiment improves. 
• Paring extended growth stock positions on rallies reduces risks if the correction deepens. Take profits to build cash for redeploying into pullbacks.

For Opportunistic Portfolios  

• Be selective within battered areas like commodities and cyclical, focusing on fundamentally sound companies with upside as negativity passes.
• Consider using options strategies to capitalize on rangebound trading while limiting risks. Collars and spreads offer targeted exposure.
• Pairing inverse ETFs or put options with prevailing downtrends could produce gains during sell-offs to balance bullish positions.

While volatility picked up late in the week on increased recession worries, stabilizing yields and resilient consumer data provided glimmers of hope. The lingering divergence between market leaders and laggards continues to produce potential opportunities. As the Fed approaches its policy pivot point, we expect choppy trading in the coming months until the outlook clarifies.

SourcesS&P
Schwab

Marketwatch