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  • Writer's pictureDustin Eldridge, CFP®, CPWA®

Last Week on Wall Street - October 28th, 2023

S&P 500: -2.53% DOW: -2.14% NASDAQ: -2.62% 10-YR Yield: 4.84%

What Happened?

The S&P 500 and the Nasdaq Composite have both entered correction territory, having experienced declines of over 10% from their recent highs in July. This challenging week on Wall Street was not attributed to Federal Reserve expectations or bond yields, which have been the primary agents of volatility lately. Instead, the key driver of this decline was disappointing corporate earnings reports, leading to significant selling pressure on prominent stocks.

Even among companies that beat expectations, forward-looking guidance from management raised concerns about potential business activity slowdowns. Notably, the earnings results and commentary from Meta and Google's parent company, Alphabet, ignited worries about softening in customers willingness to spend and a deceleration in the advertising sector. This raised broader concerns about the tech industry and triggered a sell-off in some of the best-performing stocks of 2023.

Beneath the surface, the sole gainer this week were Utilities (+1.2%) names who managed to stave off the end of week selloff. Concerns related to the Middle East conflict and declining oil prices weighed heavily on the Energy (-6.2%) sector. The struggles of Meta and Google instigated a dismal performance from the Communications (5.2%) sector broadly.

  • The cost of goods and services rose a higher-than-expected 0.4% in September

  • The index has risen 3.4% over the past year, unchanged from the prior month

  • The core PCE rate, excluding food and energy, increased a touch slower last month at 0.3%

  • The rate of core inflation over the past year fell a tick to 3.7% from 3.8%, marking the lowest level since June 2021

The key takeaway - Leading up to the Federal Reserve's policy meeting and rate decision next week, their preferred inflation measure indicated a slight stagnation in the trend of decelerating increases. However, this steadying in the data is unlikely to significantly influence their rate decision as the overall trend of moderating inflation remains intact. As of now, there appears to be little evidence that would warrant a reacceleration in prices, especially if economic weakness materializes. Despite higher prices in the economy, this report also revealed that personal spending again exceeded economist expectations. The American consumer continues to actively spend, even in the face of rising price tags. The markets mostly shrugged off this report, maintaining near-100% confidence the FOMC will keep rates unchanged.

  • Gross domestic product, a measure of all goods and services produced in the U.S., rose at a 4.9% annualized pace

    • Economists estimated a 4.7% rise

  • Consumer spending increased 4% for the quarter, contributing 2.7% of the headline figure

    • Spending was split fairly between goods and services

  • Gross private domestic investment surged 8.4% and government spending and investment jumped 4.6%

The key takeaway - As we have repeatedly written throughout this year, consumer spending in the US has remained the primary driving force behind an economy that has consistently outperformed almost every economist's predictions for 2023. This trend continued in the third quarter, with Americans spending substantially during the latter part of the summer, contributing to the impressive headline figure. The impulse for spending finally extended to goods, which had previously lagged behind services for American dollars. While this report is unlikely to prompt immediate action from the Federal Reserve, the ongoing economic resilience may push back expectations for a future rate cut. However, this resilience could face challenges ahead, as economists anticipate a slowdown in spending and, consequently, economic growth in the medium term. Only time will tell whether consumers will overcome these challenges and continue to sustain growth in the economy.

  • U.S. new-home sales rose 12.3% to an annual rate of 759,000 in September, from 676,00 the prior month

    • Sales are up 33.9% compared to last year

  • The median sales price of a new home sold in September fell to $418,800 from $430,300

  • The supply of new homes for sale fell by 10.4% equating to 6.9 months of supply

  • All regions reported an increase in new-home sales

The key takeaway - The significant shortage of supply in the existing home market, driven by homeowners holding onto their current low-rate mortgages, has led to a resurgence in new home purchases. Home builders have eagerly obliged the demand of buyers entering their market. However, there's a prevailing thought that this upsurge in activity may not be sustained. It's reasonable to assume that there are only so many potential buyers willing to contend with mortgage rates approaching 8%, and once that demand is satisfied, the housing market could experience a continuation of the slowdown. Nevertheless, it's remarkable to witness this surge in demand despite the substantial rise in borrowing costs and is indicative of a strong consumer.

From Around the Watercooler

  • The fourth time turned out to be the charm, as Republicans finally banded together and unanimously elected Rep. Mike Johnson as speaker of the House

  • The weather this winter will be milder than typical in the Northern US and wetter in the South thanks to El Niño

  • Mattel’s doll sales jumped 24% thanks to the popularity of Barbie, the summer’s biggest blockbuster, helping the toy company beat earnings estimates

  • Bitcoin briefly surged above $35,000 Tuesday for the first time since May 2022, and it’s now more than doubled for the year

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