October for investors was like Halloween for kids. Some investors got good stuff; others got circus peanuts and candy corn. The S&P 500 closed with a creepy drop in Tech stocks and finished the month down 0.87%.
There were multiple market influences that came together to close out the month: earnings from Amazon, Apple, and Google, the Federal Reserve (Fed) meeting, and GDP and PCE releases. An election in the first week of November was also something to think about, as polls were increasingly showing the likelihood of a change in Congressional leadership.
Technology and Communications Stocks Decline
Tech stocks finished the month down 6.80%, while Communications finished down 15.11%. Google’s earnings report was a large part of the selloff. Misses on revenue and earnings would be punished in any quarter, but the real concern came with negative cash flow. This is the second quarter in a row of negative cash flow, jumping from $5.9 billion in Q2 to $9.1 billion in Q3.
AI expenditures are expected to ramp up from $200 billion this year to $300 billion in 2027. Google was not alone in reporting negative cash flow. Investor patience for Artificial Intelligence spending without associated increases in revenue continues to wear thin.
Mid-Cap and Small-Cap Stocks Benefit from Market Rotation
Mid- and small-company stocks were sweet treats for the month. The S&P MidCap 400 and S&P SmallCap 600 finished up 1.90% and 3.18%. These stocks benefited from the rotation to value-oriented, non-tech stocks. Decreases in longer-term rates also provided a lift.
Foreign Markets Face Pressure from Technology and Energy Costs
Foreign stocks suffered like kids with only black licorice. The S&P Developed Ex-U.S. Broad Market Index (BMI) and the S&P Emerging BMI were down 1.17% and 5.32% for the month. Asian tech markets had been riding the semiconductor wave all year, but both South Korea and Taiwan suffered significant drops in the month as the AI trade cooled globally. Oil prices continue to put pressure on all markets, but for countries that import most or all of their energy, the increase in prices is magnified. The stronger dollar only adds to the pressure.
Trouble in Europe also has investor attention: riots in France, surging debt all over the continent, the prospect of higher interest rates, and the ongoing Russia/Ukraine war all gave investors reasons to look elsewhere.
Bond Market Performance and Interest Rate Outlook
Bonds had a good month, with the S&P U.S. Aggregate Index up 1.95%. The positive return was due to a decrease in longer-term interest rates. The Fed also helped by not raising rates during its meeting. Investors and the Fed both expect rate hikes in the future due to sticky inflation. Rising rates will not increase diesel refining or oil production, but they could slow the economy to reduce demand.
Precious Metals and Gold Market Trends
Precious metals were down 7.79%, based on the S&P GSCI Precious Metals Index. The gold market is filled with tricks and treats. Gold is down significantly from its peak, but central bank buying has been accelerating this year as prices have decreased. The World Gold Council noted that 321 metric tons were added to official reserves in the third quarter, a 42% increase from the previous year.
The trick is that attractive interest rates, reduction in gold futures demand, rebalancing, strength in the dollar, and reduced jewelry demand have worked against the metal. One of the great paradoxes of the international monetary system is that central banks own gold to reduce risk and defend their currency. However, citizens are to trust the fiat currency the bank prints. Gold can’t be wiped out in bankruptcy and is not a liability of anyone else’s, eliminating counterparty risk.
Cryptocurrency Security and Counterparty Risk
Cryptocurrency had an interesting episode to end the month. $6.3 billion in various cryptocurrencies were stolen from Binance, the largest exchange in the world. The heist took all of 20 minutes. This is where the promises of crypto—decentralized, with no government interference and anonymity—get spooky. Roughly $2.8 billion that was stolen was locked down by the crypto issuer in various wallets before the coins could be moved. $2.4 billion is being tracked and monitored through the blockchain. $1 billion is being laundered.
Clients of Binance who were affected had no insurance or government backing, just the company’s ability to cover the losses. While there is no government involvement in the crypto, some of the coin issuers were able to lock down their coins. This means that the issuer has control of the currency. Eventually, these coins will be “burned,” and new coins will be issued in their place. And another large chunk is being heavily monitored. Sounds familiar.
Looking Ahead After a Mixed October
Some houses have full-size Snickers and Skittles; some houses have small Tootsie Rolls and Swedish Fish. October had both the good and the bad for investors.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
