First, the good news. October didn't live up to its reputation on Wall Street as being crash prone. Now the bad news. It was still a spooky month for stock market investors who saw their portfolios drenched in red ink. Hopes are high the rest of the year will be better.
Much of the blame for the lousy stock market performance last month goes to an economy that proved sturdier and more resilient than Wall Street envisioned. Inflation behaved, too.
Unfortunately, the good news meant bad news for financial assets. Bonds sold off and interest rates spiked anew. Investors bet the Federal Reserve would dial back the pace and size of its rate-cutting cycle. U.S. stocks got caught in the crossfire, finishing lower to end a five-month winning streak.
What's Next For The Stock Market
Next up for markets is the outcome of the elections and any impacts resulting from policy changes on Capitol Hill.
But in October pretty much everything investors own fell in value. There were few places to hide after the yield on the 10-year Treasury note jumped half a percentage point to close October at 4.29%, its highest yield since late July.
The average U.S. diversified equity fund fell 1.02%, trimming its year-to-date gain to 14.19%, according to Lipper Refinitiv. S&P 500 index funds shed 0.94%. Small-, mid- and large cap stock funds all fell in value. Growth funds declined, as did value funds.
Diversifying with bonds and foreign stocks didn't produce any green arrows, either. General U.S. Treasury funds cratered 3.53%. Core bond funds shed 2.45%. And World Equity funds sank 3.90%.
The jump in rates caught stock market investors off guard, says Matt Brill, manager of Invesco Core Plus Bond Fund (ACPSX).
"The number one question I'm getting is, 'the Fed cut rates 50 basis points, why are rates going higher?'" said Brill. The Fed, he notes, doesn't control rates on bonds, such as U.S. Treasurys. The market does. But the simple answer to the spike in rates is "simply that the economy has been stronger than people expected," he said.
Stock Market Silver Lining
The silver lining is that a strong economy means a recession is less of a threat, says Jon Maier, chief ETF strategist at JPMorgan Asset Management. Consumer confidence is also at a six-month high, he adds, and third-quarter corporate earnings are surprising to the upside.
"So, there are a lot of things that are positive," said Maier. "It does appear that the kind of elusive soft landing looks like it's being achieved (by the Fed)."
Maier also notes that a pullback wasn't that out of the blue, given that the S&P 500 has risen 33% over the past 12 months.
When it comes to stocks, Maier says stock pickers are in a good position to outperform passive stock indexes going forward. While there's still a lot of interest in tech stocks, he says valuations are relatively high. Last month, Science and Technology sector funds were flat with a minor drop of 0.14%. They remain up 19.29% for the year.
Still, Maier sees opportunity in so-called secondary beneficiaries of the build out of AI. Utility funds, which remain one of the top-performing mutual fund sectors with a year-to-date gain of 24.72% rise despite falling 1.17% in October, are a good example. The Virtus Reaves Utilities ETF, this year's top-performing sector ETF with a 45.99% gain posted a 0.56% gain in October.
Health care and industrial companies are two other sectors that should benefit from the AI tailwind, says Maier.
Few Places To Hide
ETFs didn't dodge the pain either last month. Six of the top 20 ETF performers in 2024 eked out gains, however. Actively managed ETFs, such as Fidelity Blue Chip Growth, T. Rowe Price Blue Chip Growth, and Nuveen Growth Opportunities, finished a tad higher last month.
The sharp rise in bond yields did impact parts of the market that are interest rate sensitive. Funds and ETFs that invest in banks, whose earnings get a boost from higher rates, were solidly in positive territory. Invesco KBW Bank ETF, for example, rallied 6.69% in October to extend its 2024 gain to 30.10%. On the fixed-income side, Simplify Interest Rate Hedge ETF, which goes up in value when bond yields rise and bond market volatility picks up, jumped 17.82%. The spike in rates, though, hurt ETFs that invest in long-term bonds, such as iShares 20+ Year Treasury Bond ETF, which fell 5.46% in October.
But higher rates cut both ways. Real estate and homebuilders don't fare well when borrowing costs go up. In October, SPDR S&P Homebuilders ETF declined 8.31%, iShares US Home Construction fell 7.77%, and Xtrackers International Real Estate ETF dipped 7.53%.
The upside to surging bond yields is it gives investors another shot at moving money out of cash — which will see yields shrink with each Fed cut — into bonds with longer maturities to lock in higher yields for longer, says Brill.
"(Investors) get another bite at the apple," said Brill.
There's Still Time
It's not too late for investors to go out farther on the curve, Brill says. With the 10-year Treasury solidly back above 4%, investors again have a good entry point and starting yield to earn a fatter yield get some downside cushion for their bond holdings, says Brill.
Since it's difficult to time the market perfectly, Brill advises bond investors to dollar-cost-average their way back into bonds with longer duration.
And with the economy showing strength and recession fears falling, Brill also likes high yield bonds and investment grade credit, as the risk vs. reward is attractive with less risk of default and other headwinds. Brill says his fund is adding high yield and is overweight investment grade bonds.
Election Turbulence
Some sectors stumbled in October due to election bets. iShares Global Clean Energy ETF was the biggest loser with a 10.82% drop on fears that Donald Trump, who favors oil companies over green companies, would win the election.
The biggest risk for the stock market is if the economy continues to hum along and that strength either causes inflation to reignite or the Fed to pare back its rate-cut plans, adds Maier.
"I think the biggest concern would be a reigniting of inflation for whatever reason, and the Fed changing course," said Maier.
