Market Serves up Tricks and Treats

By Aoifinn Devitt, CFP® – Chief Investment Officer

It’s cooling down outside now, but earnings season is heating up.  As expected the outlooks are looking warm and cozy, at least so far, with a wide range of sectors – from consumer goods to telecoms and technology all posting positive financial forecasts. This was generally in line with expectations as the look-back nature of earnings seemed set to capture surprising resilience of the consumer and an economy that just keeps humming.

Markets were decidedly off in the past week though, delivering their worst week in a month, with certain sectors such as solar energy and regional banks just caving in to souring sentiment. The double digit fall in solar energy stocks (e.g. SolarEdge and Enphase Energy) continues a fall out of favor of the entire sustainable energy complex as rising costs and weaker order flow called into question business models that had been priced for perfection. Regional banks too can’t catch a break with stocks there falling despite better-than-expected profits and topping forecasts.

When we marry this with the ongoing honeymoon for tech stocks – the Nasdaq remains up over 30% year to date – we can see just how set in its ways market sentiment has become.  Not only are we seeing concentration among the Magnificent 7 tech stocks, but we are also seeing more distinct polarization between winners and losers too, with likely overreactions on both sides.

Source: Morningstar as of 10/23/23

The bond market was the real spectacle in the past week though.  Although the Fed has recently paused in its rate rise cycle these “hawkish pauses” are stoking speculation of a higher for longer regime, which bond markets started to reflect in the past week.  The dramatic movement in longer dated credit (the 10 year topped 5% last Thursday for the first time since 2007, while long term mortgage rates nudged 8%) delivered a blow to bond funds and the eerie reflection of 2022 conditions also chipped away at sentiment.  Traditional safe haven assets such as gold and less traditional ones (by no means “safe”) such as Bitcoin all rallied in the past week, while oil settled down to around $88 following the geopolitical shock in Israel earlier in the month.

We may be close to a turning point in the bond sell-off though as the “closing of shorts” in bonds has heralded, maybe, a bottom for bonds.  The logic is that the economy is worse than it looks, and in a recession or slowdown bonds are the “least worst” risk option.  In a year where good news has been “bad” for markets and vice versa, it is only natural that this logic would appear as a bit of a conundrum – particularly when earnings are looking so positive. But maybe it is one of those “Tricks”. While all of the “Treats” seem to be in tech today, investors would be wise to tread carefully and watch for ghouls in the weeks ahead.


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