Market Update – October 27th, 2023

Author:  Joe Maas, CIO SPG Advisors LLC

Financial Markets:
As we close out the last full week of October ahead of a Fed meeting on November 1st, equities ended lower for the month. As of close Thursday October 26th, the 10-year US Treasury yield gained +5.54%, while the Dow Jones Industrial Average fell -1.94%, the S&P 500 fell -3.53%, and the Nasdaq Composite fell -5.35% in the month of October.

Market News:

Third Quarter GDP. Real GDP for the third quarter rose at an annual rate of 4.9%, faster than what economists had expected. The robust increase in real GDP can be attributed to higher consumer spending, increased private inventory investment, a rise in exports, greater state and local government spending, increased federal government spending, and higher residential fixed investment.

In Q3, consumer spending continued to roar in both necessary services, such as housing and utilities, but also in discretionary services, like food service and accommodations. Overall, this quarter’s GDP report paints a mixed picture about the economy – on one hand the economy is not slowing yet, however on the other hand, this comes at a cost of increasing government debt and a consumer that is spending down their savings.

Durable Goods Orders. Alongside a slew of other bullish economic data in the month of September, Durable Goods orders came in strong at a monthly increase of +4.7%. Excluding defense, the figure came in even stronger at a monthly increase of +5.8%. The leading category of new orders was transportation equipment, increasing +12.7% month over month, including a +92.5% jump in nondefense aircraft orders in September. This data presents another added layer of confusion into economic outlooks as airlines ramp up their aircraft selection, ahead of what they may expect to be another season of strong travel demand in 2024.

September:

Personal Income, Spending, & Saving. September’s personal income saw a +0.3% monthly increase, while spending rose +0.7% in the month. With increased spending and only a slight increase in income, the personal savings rate shrunk to just 3.4% of disposable income, down from August’s upwardly revised 4% savings rate. All of this demonstrates another month of consumers not cutting back, but needing to decrease the amount they save and, in some cases, dipping into their savings, to maintain their lifestyle.

September PCE Inflation.

The Fed’s preferred method of inflation tracking, personal consumption expenditure inflation, posted as expected with headline PCE at +0.4% MoM and Core PCE (which excludes food and energy) at +0.3% MoM. On an annual basis, PCE amounted to +3.4%, the same as July and Augusts’ data, while Core PCE came in at +3.7%, down slightly from August’s +3.8% Core inflation rate.

Behind the data, energy led the greatest monthly price increase, up +1.7% in the month. Additionally, total goods inflation rose only +0.2% MoM in September, while the service sector remained hot at a +0.5% MoM increase in prices. This comes as we head into a Fed meeting next week, where Powell is expected to announce no rate hike in November, despite inflation in most measures still running above their 2% target.

Q3 Earnings:

This week alone, over 20% of the S&P 500 reported earnings, with 79% of those companies beating earnings estimates for Q3. Big names like Microsoft and Amazon posted double digit percentage EPS beats, sending those names higher despite the general pullback we saw this week.

From the 47% of S&P 500 companies who have reported (as of October 27th), earnings are up +15.5% YoY, with those who haven’t reported yet, largely utilities, energy, and technology, expected to still show an annual decline of around -9.4%. Overall, this earnings season has gone much better than expected so far and little evidence of a recession seems to be showing up in companies’ results.

Summary:
This week marked a lower close for equities in the last full week of October, despite positive economic data and Q3 earnings growth. Third-quarter GDP exceeded expectations, primarily driven by increased consumer spending and government expenditures. September Durable Goods orders were strong, particularly in the transportation sector.

Personal income saw a slight rise, but spending outpaced it, reducing the savings rate, amidst a sticky PCE inflation rate in September. Q3 earnings reports were quite positive, with most of the reported S&P 500 companies beating estimates, despite concerns about a looming recession. We will continue to closely monitor market and economic data for further insights and to best manage our portfolios.

We appreciate your continued trust.

Thank you, Joseph M. Maas, CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.