Investment Commentary | October 2024

October Started with Treats but Ended with Tricks

The month of October has been challenging over the past few years, as the stock market hit lows and rebounded to highs in both 2023 and 2022. This time, the market moved higher for most of the month but erased all the monthly gains in the final two days, ending with the S&P 500 index down 0.91%.

With elections and geopolitical turmoil around the globe, there was a witch’s brew of reasons for the market to be spooked. However, it was not one of the usual suspects that led to the decline. One of the catalysts for the downward move in stocks was concerns about artificial intelligence (AI) spending.

AI Technology

Even after beating both revenue and earnings estimates, Apple, Microsoft, and Meta fell as a direct result of investors’ concerns regarding future spending on AI infrastructure. So far, hundreds of billions of dollars have been spent on the AI arms race, with billions to be spent in the years ahead. For all the spending, investors have not been able to see meaningful revenue from AI yet. The big tech companies are not giving up any time soon, with executives seeing the loss of the AI race as an existential threat to their company. With the vast sums of money dedicated to building capabilities, any retreat would be seen as a huge failure for the executives at these companies. However, the burn-the-boats mentality expressed by some executives about the amount of spending is difficult for investors to reconcile. While it is likely too early to give up on AI technology, investor patience seems to be in limited supply.

Small Cap Struggles

Smaller US companies also failed to provide any treats, following their bigger peers lower for the month. The Russell 2000 index finished the month down 1.44%. The future path of interest rates was more of a concern in this market. Economic data showed surprising strength during the month, including unemployment, consumer spending, and retail sales. The market fully anticipates a rate cut in early November, but stronger economic data could lead to a slower path forward for rate cuts. There is an estimated 40% of smaller capitalization (cap) companies that are unprofitable. Higher interest rates will continue to stress these companies and returns. Lower rates benefit unprofitable companies, as well as Real Estate and Financial sectors which have a slightly higher weighting in the small cap index compared to the large cap index.

Unremarkable Results for Global Markets

Investing outside the US didn’t bring better results, with both the developed market index and the emerging markets index down for the month. The MSCI EAFE index for developed markets was down 5.44% for the month, and the MSCI Emerging Markets index was down 4.4%. The story in the developed markets continues to be the struggles in the Eurozone. Germany has gone from being an economic powerhouse, to struggling through a recession. In conjunction with economic woes and the war in Ukraine, political issues are causing a difficult situation for the country.

China ended September with a bang, finishing the month up 23.9% based on the MSCI China NR USD index. The strong monthly return was due to China’s government announcing economic stimulus for their ailing economy. After such strong returns a pullback was hardly unexpected. As the details of the economic stimulus emerged in October, investors were unimpressed, sending the index down 5.91% for the month. Surprisingly, the Chinese index is still outpacing the S&P 500 for the year.

Bond Market Faces Headwinds

Bond investors suffered the same fate as those in the equity markets, with the Bloomberg US Aggregate Bond index falling 2.48%. The changes in short term rate cut expectations, coupled with massive debt issuance from the US government led to the drop. The $35 trillion debt, and the associated interest payments, has led to increased rate demands from bond investors. As the US debt, deficit, and interest expense continues to grow, interest rates may continue to follow suit. There are tools at the Federal Reserve’s disposal such as resuming bond purchases, but economic growth and the current level of long-term interest rates do not justify any changes in their current approach.

Only Treats from Precious Metals

Gold and silver returns continued a strong year, adding 3.86% in the month based on the S&P GSCI Precious Metals index. Central bank buying, geopolitical concerns, and a growing distrust of fiat currency continue to drive buying in gold. Silver continues to be in a deficit between the amount used in industrial applications, and the amount being mined. Additionally, Russia announce that they would add silver to their Central Bank reserves, potentially adding a large buyer to an already stressed market.

Ghouls and goblins were not the only things keeping investors on their toes in October. With US elections and the Fed meeting in the first week of November, investors are certainly hoping for more treats than tricks.