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October in the markets

October in the markets

October 29, 2024

Topic of the week:

A few months ago we wrote in this weekly note about ‘Sell in May and go away’, a strategy followed by some investors based on reducing the risk of their portfolios in May and investing again at the end of the summer. A contrary philosophy would be for those investors to ‘Buy and hold’, i.e. stay invested regardless of what the market does in the short term because this strategy, in the long term, reduces the possibility of losses. Regardless of the stance taken by each investor, October is usually a statistically positive month for equities. After going through June, July, August and September (the latter being statistically the worst month of the year), October is usually the start of an upward quarter. And this year, with 2 days to go, is no exception, at least in the US, where returns for the period are positive, continuing the general trend for the year. However, October is famous for being the period where some of the most dramatic and frightening moments (very much in line with the approaching Halloween) in the history of the stock markets have occurred.

In 1987, the markets of the major economies suffered one of the biggest blows in living memory, with intraday declines exceeding even any of the dates of the Great Depression of 1929. On the famous Black Monday of 1987, the US Dow Jones index of major industrial companies fell by 22.6%, the largest daily percentage decline of the US index in history to date. Today, the main catalyst is still unknown, with several issues troubling the US economy at the time, although none of them individually threatened the future of the stock market. The rise in benchmark interest rates the previous month, the ballooning government deficit, excessive speculation, the Persian Gulf war and even the new technology that was being introduced at the time, would have caused these massive falls, known as a ‘Flash Crash’ or market crashes.

In October 1929, what was to be the first global crisis, known as the crash of 1929, began. Between 24 and 29 October of that year, the markets suffered sharp falls, especially on Black Monday, when the Dow Jones index fell by 13%. That day was preceded by the bailout of the New York Stock Exchange by the major US banks, which had supported key stocks with massive buying on Friday of the previous week. The following Tuesday, the Dow Jones fell another 12%. The bear market continued until January 1932, with a cumulative decline of 86%, creating a domino effect that would affect the economy and society not only in the United States, but also in Europe and the world at large. One of the fatalities of this stock market crisis was that it directly affected the retail investor, something that had never happened before, as the stock market was previously reserved mainly for institutional investors. Moreover, investing on credit boosted household indebtedness, causing many to lose everything they had.

It is true that these crises are rare, but despite this, in the last 5 years we have experienced two periods in stock markets with falls of more than 20% (2020 due to the pandemic and 2022 due to high inflation and sharp rises in interest rates). What is usual, at least once a year, is to suffer a market correction of at least 10% at some point during the year. In 2023 and so far in 2024 this has not happened and, although this does not mean that it will happen in the short term, it is worth remembering that these episodes of volatility are common, so a long-term investor should not change their strategic plan as often, although it may seem counter-intuitive, the biggest risk of investing is not being invested.

The beacon of the markets:

The S&P 500 closed last week down close to 1%, its first decline after six consecutive weeks of gains. In Europe, the Euro Stoxx 50 and the Ibex 35 performed very similarly, correcting -0.87% and -0.95% respectively. The Nasdaq 100, on the other hand, posted a minimal gain of +0.14%, awaiting the results of the Magnificent 7, five of whose members will report third quarter results this week. The market consensus is that they will present growth in their income statements, but these will be the lowest in the last year and a half.

In the bond market, yields rose across the board due to a number of factors, the two most notable of which are the continued good macroeconomic data from the US economy and the close polls ahead of next week’s US gubernatorial elections. The 10-year Treasury yield rose 15 bps to end the week at 4.23%, its highest level since July. In Europe the rise was 12 bps for the Bund to end the week with a yield of +2.30% and the Spanish Bono at 2.99%.

In the alternative markets, gold again set a new all-time high at 2,772.60 USD/Oz, tension in the Middle East weighed more on investors’ decisions than the sharp rebound seen in bond yields, and more importantly, the considerable downward readjustment of expectations of interest rate cuts, especially in the US, where a rate of 2.68% for December 2025 has gone down to the 3.40% currently discounted by the market, i.e. three cuts less. The US has gone from discounting a rate of 2.68% for December 2025 to a rate of 3.40% currently discounted by the market, i.e. three falls less. Brent gained +4.10% for the week, in an environment in which Israel’s expected attack on Iran led to defensive positions being taken, although in the end the attack was very selective and did not target oil installations, which caused a reversal of the rise in the early stages of the week’s trading. In the medium and long term, US stockpiles and economic apathy in China should be the catalysts for oil prices.

On the macroeconomic front we got PMIs in both Europe and the US. In both cases the manufacturing data was above market expectations (positive surprise), which is a good sign given the accumulated weakness in the industrial sector, especially in Europe. In services, in the US, once again the data presented exceeded analysts’ estimates, as the services sector continues to be very strong, maintaining its leadership in the economy. On the other hand, in Europe the data was weaker than expected (negative surprise), with a slight recovery in Germany, but with very bad data in France, which led the composite index to fall below the 50-point benchmark, i.e. in the contraction zone. Expectations and consumer confidence from the University of Michigan also exceeded forecasts, a further sign of financial muscle in the world’s leading economy.

This week will bring the most awaited data for managers, CPI, GDP and unemployment rate in Europe and GDP (provisional data), non-farm payrolls and employment data in the US. No surprises are expected in the European data, the most noteworthy is that inflation may rebound two tenths to 1.9%, but with core inflation dropping again by one tenth to 2.6%. In the US, the official employment data will not be released until the middle of the week, but the unemployment rate is expected to remain at 4.1%.

We should not forget that we are entering the final week of the campaign in the US and everything is still to be defined according to the polls, which show an absolute equality of data. The weekend election result in Japan has caused the current coalition government to lose its majority, which has immediately led to a fall in bond yields and the Japanese currency.

The quote:

And we leave with the following quote from Richard Buckminster, American designer, architect and inventor, university professor and prolific writer: ‘You don’t change things by fighting the existing reality. You change something by building a new model that makes the existing model obsolete’.

Summary of the performance of major financial assets (10/29/2024)

This report does not provide personalized financial advice. It has been prepared irrespective of the particular circumstances and financial objectives of the persons receiving it.

This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information at the date of issue of the report and is subject to change without notice.  Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the contents of this document. Neither this document nor its contents constitute an offer, invitation or solicitation to purchase or subscribe for securities or other instruments or to make or cancel investments, nor may they form the basis of any contract, commitment or decision of any kind.

The information contained herein has been obtained from public sources believed to be reliable, and while reasonable care has been taken to ensure that the information contained herein is neither uncertain nor unequivocal at the time of publication, we do not represent that it is accurate and complete and it should not be relied upon as if it were.  Portocolom Agencia de Valores S.A. assumes no responsibility for any loss, direct or indirect, that may result from the use of the information provided in this report. Past performance of variables may not be a good indicator of future performance.