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Edition 44: Interest Rates: Lower for Longer?

The Signal

Interest Rates: Lower for Longer?

October Market Recap

The S&P 500 Index returned 7.99%

The Bloomberg U.S. Aggregate Bond Index returned -1.29%

Fed Funds Target Range: 3.75% – 4.00%

 

Economic Review

At the FOMC meeting early in the month, the statement from the Federal Reserve added language about letting the economy catch up to the rate increases already enacted, leading to hopes that the path forward would mean lower or paused rate increases and potentially skirting a recession. Said hopes were promptly dashed by Powell’s announcement that overall rates will likely need to be higher than previously thought. Fed messaging since then has held to the line that a pause is unlikely. With economic data showing some movement in the right directions, both up and down, are we really headed for recession?

Let’s get into the data:

  • The October non-farm payroll number was 261,000. The report from the Department of Labor marked the slowest increase since December of 2020. This was a slight decrease from the September number, released in early October, of 263,300.
  • 12-month CPI was 7.7% in October. The Bureau of Economic Statistics reported the first significant inflation reading to beat estimates on the “good” side.
  • Third quarter GDP came in at 2.6%. The positive number is a bounce back from the negative first and second quarter numbers.

We’re seeing a still-hot but cooling labor market, a return to growth, and progress on inflation. Why is Powell not more thankful?

Maybe he is. Powell has been explicit that a pause is not likely in the near term. One way to read it is that the Fed does intend to pause, just not as quickly as the markets would like. By steering away from the idea of pivot, and reiterating that rate increases will continue, but more slowly, Powell is attempting to give the economy time to adjust. The goal is to guide an economy that is healthy into an eventual soft landing, even if there’s a shallow and short recession on the way there.

 

Market Review

Equity markets enjoyed positive performance over the month, erasing some of the negative year-to-date results. However, volatility continues to increase. Daily intraday volatility, measured by the daily high/low, increased to 2.14% in October from September’s 1.91%. It was 1.28% in August. Year-to-date volatility was 1.88%, compared to 2021 volatility of 0.97%, which was more in line with historical levels.

The 10-year U.S. Treasury ended the month at 4.05%, up from 3.84% in September. The 30-year U.S. Treasury ended October at 4.17%, up from 3.78% last month. The Bloomberg U.S. Aggregate Bond Index ended October down 1.29%. The year-to-date return at month end was -15.71%.

The U.S. high yield market, as measured by the ICE BofA U.S. High Yield Constrained Index increased by 2.84% in October, bringing the YTD return to -12.18%.

Preqin has released a report titled “The Future of Alternatives in 2027.”  Private equity, venture capital, private debt, infrastructure, real estate, and natural resources, are expected to reach $18.3 trillion by the end of 2027, up from $9.3 trillion in 2021. According to Preqin, private debt will have an annual asset growth rate of 10% between 2021 and 2027.

Chart of the Month

A Manufacturing PMI® above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy. The Institute for Supply Management reports that “The U.S. manufacturing sector continues to expand, but at the lowest rate since the coronavirus pandemic recovery began.”

A Key Manufacturing Index Continues to Show Expansion

Source: Institute for Supply Management

By The Numbers: A Directional Snapshot

  • Financial advisors polled said they intend to increase the percentage of allocations to alternatives to nearly one-fifth of investment dollars under management over the next two years.
  • Why the focus on alts? More than 2 in 3 advisors polled said these strategies are necessary this year to reduce exposure to public markets and volatility and help to enhance client returns.
  • 84% of people polled are thankful for family. Only 21% are thankful for wealth.

Source: Wallethub, Cerulli, Cerulli

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