A Momentous Week in Financial Markets

A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., October 27, 2023. REUTERS/Brendan McDermid

New York, October 27 (Reuters) – Financial markets are preparing for what could be an eventful week, as a Federal Reserve meeting, U.S. employment data, and earnings from technology giant Apple Inc (AAPL.O) have the potential to shape the trajectory of stocks and bonds for the remainder of the year.

October has proven to be a volatile month, with stocks feeling the pressure from a surge in Treasury yields and geopolitical uncertainties. The S&P 500 index (.SPX) is currently down 3.5% for the month and has experienced losses of over 10% since its peak in late July.

Whether the rest of 2023 continues to be a bumpy ride may depend largely on the bond market. The Federal Reserve’s stance on interest rates, described as ‘higher for longer,’ and growing concerns about U.S. fiscal matters, have pushed the benchmark 10-year Treasury yield to 5% earlier this month – the highest level since 2007. Higher Treasury yields can pose challenges for stocks, as they compete with equities for investors.

Investors are worried that yields may rise further if the Fed reinforces its hawkish message at the November 1 monetary policy meeting. Additionally, strong U.S. employment data expected next Friday could cause yields to increase if it supports the case for maintaining elevated interest rates to cool the economy and prevent a rebound in inflation.

“Stocks will start to recover when the market believes that bond yields have peaked,” said Sam Stovall, chief investment strategist at CFRA Research.

Futures markets currently indicate a high probability (near-certainty) that the Fed will not raise rates in November, and an almost 80% likelihood that rates will remain steady in December, according to CME’s FedWatch Tool. However, policymakers have projected that they will keep the key policy rate unchanged for most of 2024, a longer timeline than what markets had previously anticipated.

Investors are now engaged in a “waiting game” to see how much economic data needs to improve in order for another rate hike to be considered, according to Alex McGrath, chief investment officer for NorthEnd Private Wealth.

With U.S. Gross Domestic Product growth at a strong 4.9% in the third quarter, signs of a overheating labor market or the perceived need for further tightening to control inflation could add fuel to the fire of volatility.

“It feels like we are at a crossroads whether or not the strong growth we’ve seen over the summer months will continue over the fourth quarter,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, referring to concerns over inflation and restrictive monetary policies that are still prevalent.

In addition to concerns in the bond market, the Treasury is expected to announce its upcoming auction sizes later this week, further adding to worries about a growing federal deficit and increased supply.

Investors are also eagerly awaiting Apple’s earnings report on Thursday, especially after disappointing results from growth and technology giants like Tesla and Google. While the tech-heavy Nasdaq 100 index is currently down 11% from its high, it is still up nearly 30% for the year.

However, some investors believe that the worst of the selling may be over.

Sam Stovall of CFRA Research points out that a stock market rebound would align with historical seasonal trends. Since 1945, the S&P 500 has experienced an average gain of 1.5% in November, making it the third-best performing month of the year.

Furthermore, certain trading patterns this year indicate a potential rebound in the stock market during the fourth quarter. According to Ned Davis Research, in the 14 instances when the S&P 500 has gained at least 10% through July and then declined in August (as it did this year), the index has increased every time during the last four months of the year, with an average gain of 10%.

Technical indicators also suggest that stocks are currently oversold and may rally if economic data meets expectations, according to Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research.

“The stock market is poised for a late Q4 rally.”

Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang

Our Standards: The Thomson Reuters Trust Principles.

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