Week in Review: October 27, 2023

October 27, 2023

Recap & Commentary

Markets ended the week lower, with both the S&P 500 and NASDAQ entering correction territory, i.e. down 10% or more from recent highs. Unlike prior weeks, higher rates were not the immediate factor, as the 10-Year Treasury yield declined 0.09% over the course of the week.

Instead, disappointing earnings from a handful of large tech companies, and a general foreboding about higher rates, appeared to be the largest drivers. Not even a stellar third quarter GDP report was able to stem the tide, as investors seemed to fret that growth going forward could be significantly slower. Despite the better-than-expected report, market expectations for a December rate hike actually fell from 29% to 18%. Economic activity has continually surprised to the upside in 2023, especially relative to expectations at the start of the year that the economy would be in recession by now.

Through Friday, 49% of S&P 500 companies had reported 3Q23. Thus far, 78% of those companies have exceeded their consensus estimate. According to industry group FactSet, consolidated S&P 500 earnings are expected to be 2.7%. Should earnings growth prove to be positive for the quarter, it would mark an end to the earnings recession that has witnessed three consecutive quarters of negative earnings growth.

Economic Commentary

A busy economic calendar was highlighted by 3Q GDP and core personal consumption expenditures (PCE) inflation, the Fed’s preferred inflation measure. Consumer spending helped power the economy to an annualized growth rate of 4.9% in the third quarter, a steep increase from the 2nd quarter’s 2.1% growth. Spending increased at a 4% annual rate and contributed to more than half of the quarter’s growth. Additionally, the economy was aided by business spending on inventory and government spending. Business investment fell slightly during the quarter on lower equipment spending.  While the report came in far stronger than consensus expectations, questions remain about whether the consumer can maintain this level of spending against a backdrop of tighter financial conditions, depleting excess savings, and still elevated prices.

Core PCE was in line with expectations for September but reaccelerated to 0.3%, up from 0.1% in August. Compared to a year ago core PCE slowed to 3.7%, down from 3.8% in August. Personal incomes rose by 0.3% during the month but significantly lagged personal spending which surged 0.7%. Purchases of both good and services were strong, up 0.7% and 0.8% respectively.

Housing data also came in stronger than anticipated last month.  After a steep sales decline in August, new home sales rose 12% in September to an annualized rate of 759k.  Expectations had been for sales to hit an annualized rate of 680k. Pending home sales also surprised to the upside, rising 1.1% vs. expectations for a 1.8% decline. Despite the increase, pending sales are down 11% since last year and remain at historically low levels as mortgage rates have surged to 20-year highs.

Of Note

Chevron announced it is purchasing Hess for $53B, less than two weeks after ExxonMobil announced its $64.5B purchase of Pioneer Natural Resources. Both deals continue the ongoing trend of consolidation within the energy sector.

Market Indices   (As of 10/27/2023)

• Oct. Employment Report
• ISM Manufacturing
• ISM Services
• Consumer Confidence
• JOLTS Job Openings
• Weekly Jobless Claims