October 2023 | Equity Commentary
Published on November 11, 2023
Stocks posted their third consecutive month of negative performance in October, with the S&P 500 declining -2.1% for the month.1 From the late July peak through the end of October, the S&P 500 has fallen -8.6%,1 which is not technically a correction but, to us could be fairly framed as one. Hamas’s October 7 attack on Israel weighed on sentiment early in the month, and three weeks without a speaker of the U.S. House of Representatives also contributed to uncertainty. However, U.S. economic growth remained quite strong during this period of stock market weakness, and the corporate earnings recession of the last three quarters appears to be over. Looking forward, seasonality may work in the stock market’s favor, with historically positive returns for the November – January period. In the bond markets, the 10-year U.S. Treasury bond yield continued to move higher, rising sharply from 4.57% to 4.93% over the course of October.2
The U.S. economy accelerated in the third quarter. According to the “advance” estimate from the Bureau of Economic Analysis, U.S. GDP expanded at a 4.9% annual rate in Q3, which marks a significant pickup from Q2’s 2.1% pace. On the positive side, GDP growth was largely driven by consumer spending, underscoring ongoing resilience amid higher prices. Q3 output was also boosted by increases in private inventory investment, government spending, and exports. On the negative side, business spending fell off slightly, and commercial and industrial lending declined. These data points suggest that banks and businesses felt inclined to bolster cash reserves in the quarter.3
A closer look at the U.S. consumer reveals a mixed, but mostly positive picture. On the plus side, monthly payroll growth has averaged 258,000 per month over the past year, with wages steadily pushing higher along the way. In October, employers added 150,000 new jobs and average hourly earnings rose 4.1% year-over-year. A key takeaway here is that wage growth now exceeds inflation, which means real wages are going up for Americans – a factor that’s likely bolstering spending. Indeed, real disposable income rose 3.0% during the first nine months of the year, though higher gasoline prices in Q3 took a small bite out of those gains.4 Lastly, U.S. labor productivity rose at 4.7% in the third quarter, the biggest improvement since 2009 (if we exclude the period immediately after COVID shutdowns).5
The October jobs report did show signs of labor market cooling, however. Nearly all of the job gains came from just three sectors—healthcare, government, leisure & hospitality—with the rest of the economy effectively seeing no job growth for the month. We’d also note that monthly payroll gains have slowed to 204,000 over the past three months, and the unemployment rate has been slowly but consistently moving higher. It registered at 3.9% in October, up from 3.4% in April.4 It is possible that the lower October payrolls figure was negatively impacted by the UAW strike, in which case we’d expect to see those jobs return to the November payrolls figure.6
Americans are employed and earning higher wages, but higher net worth and demographics are also arguably contributing to resilient spending. Household net worth rose from $116.7 trillion at the end of 2019 to $154.3 trillion as of the end of Q2 2023, with half of that wealth concentrated in the Baby Boomer demographic.7 According to the Census Bureau, 17.7% of the population was 65 or older in 2023, the highest percentage going back to 1920. Boomers tend to have relatively stable and healthy finances that benefit from higher interest rates, and many are also just entering retirement, which is a time for less working and more spending. In 2022, Americans age 65 and older accounted for 22% of total consumer spending, the highest percentage since records began over 50 years ago. It’s also up significantly from the 15% of consumer spending that seniors accounted for in 2010.8
Despite the strong jobs market and an ongoing willingness to spend, recent data suggests U.S. consumers felt worse about their economic prospects in October than they did in prior months. The Conference Board’s index of consumer confidence fell to 102.6 in October, marking three months of consecutive declines and returning to levels last seen in late 2022 (which, recall, was a year of rising interest rates and a bear market). Consumer confidence metrics fell across a broad range of categories, spanning consumer outlooks for income, business, and employment. The onset of war in the Middle East and the lack of speakership in the House of Representatives may have contributed to souring sentiment.9
The headline personal consumption expenditures (PCE) price index, registered at 3.4% year-over-year in September, consistent with July and August’s readings. On a monthly basis, the headline PCE price index rose 0.4%, which was consistent with August but marks an increase from earlier in the summer. As expected, on November 1 the Federal Reserve held the benchmark fed funds rate steady at a range between 5% and 5.25%. Fed officials have now ‘paused’ rate increases at two consecutive meetings, which marks the longest stretch without a rate increase since they started their tightening campaign in March 2022. The Fed likely considers the downtrend in inflation and higher long-term interest rates as two factors working in the right direction, since the former means their primary objective is being addressed and the latter implies tighter financial conditions looking ahead.10 We believe this pause may indicate that the odds of the Fed being done with its rate hikes have increased.
Sources
1.Bloomberg: SPX Index TRA Function
2.Bloomberg: USGG10YR Index TRA Function
3.Gross Domestic Product, Third Quarter 2023 (Advance Estimate) _ U.S. Bureau of Economic Analysis (BEA).pdf
4.Employment Situation Summary – 2023 M10 Results.pdf
5.Bloomberg: Q3 2023 Productivity vs History
6.Twitter.com Biancoresearch.pdf
7.Yardeni Research Morning Briefing Trick Or Treat .pdf
8.The U.S. Economy’s Secret Weapon_ Seniors With Money to Spend – WSJ.pdf
9.US Consumer Confidence.pdf
10.Personal Income and Outlays, September 2023 _ U.S. Bureau of Economic Analysis (BEA).pdf
As of October 31, 2023
