Bond market snatches spotlight from stocks
E*TRADE from Morgan Stanley
As investors look around the corner to a presidential election and a Fed rate decision, the US stock market is coming off its first down month since April—and only the second of the past year—as interest rates staged a surprising increase.
For most of October, though, it looked like the market would extend its monthly rally amid solid economic growth numbers and moderate inflation data. The S&P 500 pushed to multiple record highs in the first half of the month before losing momentum as the benchmark 10-year Treasury yield climbed to its highest levels since late July.
Still, the S&P 500 remained in positive territory for the month until October 31, when a sharp sell-off pushed it into the red:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.)
But the US market outperformed international markets. Overall, developed and emerging markets fell much more in October than US benchmarks, and continued to lag for the year.
Meanwhile, bond prices tumbled as yields jumped, arguably pressuring equities in the second half of the month. The 10-year T-note yield, which began October near the 15-month low it hit in mid-September, posted its second-biggest monthly increase of the past two years (49 basis points), ending the month at 4.28%:
Data source: Power E*TRADE and FactSet. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.) Note: crude oil, gold, and U.S. Dollar Index data reflect spot-market prices. BPS (basis point) = 0.01%. MSCI Index of Developed Markets and MSCI Emerging Markets Index represent “total-return” performance (index change including dividend reinvestment).
While economic data continued to mostly surprise to the upside, it may have a mixed message. According to Morgan Stanley Wealth Management, the 10-year yield’s surge may be a warning that better-than-expected economic growth implies higher real rates and inflation expectations—factors that are likely to slow Fed rate cuts and potentially create headwinds for richly valued stocks. The analysts also note the yield increase may be highlighting potential risks around fiscal and monetary policy.1
Morgan Stanley & Co. strategists upgraded cyclical stocks last month in the wake of a strong jobs data and their economists’ expectations for continued Fed rate cuts.2 The logic: A rising-rate, good-news-is-good environment favors large-cap cyclical stocks over defensive names. They also noted their institutional client base was under-positioned in cyclicals—particularly financials, which got the final earnings season of 2024 off to a solid start and ended the month as the strongest S&P 500 sector.
The megacap tech leaders that reported earnings in the final week of the month posted mixed results, and weakness in some of their stocks contributed to the market’s end-of-month decline.
While election day will soon be history, the election itself may not be—because, as Morgan Stanley & Co. strategists point out, the time-consuming nature of counting mail-in ballots means there’s a good chance it will take a while to know who actually won.3 Markets dislike “unknowns,” so the longer any uncertainty lasts, the more it could potentially weigh on market sentiment.
Interest in SMRs as a solution for the energy demands of AI-driven data centers exploded last month, with some stocks in the space rallying to record highs.
Insight of the month: SMRs go nuclear. Morgan Stanley & Co. analysts called attention to the growing interest in nuclear energy—specifically, Small Modular Reactors (SMRs) as a solution for the energy demands of the new generation of AI-driven data centers. High-profile announcements last month from Google and Amazon about their SMR partnerships propelled some stocks in the space to multi-year or all-time highs, including NuScale Power (SMR) and Oklo (OKLO)—two stocks the analysts cite as “pure plays” in the space.4
November market history: setting a high bar. As always, the market’s path will be dictated by current “facts on the ground,” with the election and the Fed rate decision looming large in the near term. Historically, though, November has been one of the strongest months for US stocks, especially in recent decades. The S&P 500 gained ground in November in 23 of the past 30 years, with a median return of 2.8%—larger than any other month.5
Key November dates: Employment Report (11/1), Fed interest rate decision (11/7), CPI (11/13), PPI (11/14), retail sales (11/15), housing starts (11/19), home prices (11/26), PCE Price Index and FOMC minutes (11/27).
1 MorganStanley.com. The GIC Weekly: All Over but the Shouting. 10/28/24.
2 MorganStanley.com. Market Spins Toward Cyclicals. 10/14/24.
3 MorganStanley.com. US Election: Situational Awareness—One Week Out. 10/28/24.
4 MorganStanley.com. A Nuclear Renaissance for SMRs. 10/23/24.
5 Figures reflect S&P 500 (SPX) monthly closing prices, 1957–2023. Supporting document available upon request.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.