Beacon 'Pointe of View'

* * *

The Quick Facts

The S&P 500 declines by 0.9% for the month, bringing the YTD positive return to 21.0%.
Both EAFE (Europe, Australasia, and the Far East) and EM (Emerging Markets) significantly underperform U.S. equities in October with -5.4% and -4.4% returns, respectively.
Treasury yields are on the rise, the largest selloff since September 2022.
Bond market volatility surges in October, with the BofA MOVE index reaching 135, a year-to-date high.
Trump wins the 2024 presidential election, and a Republican sweep looks increasingly likely.
The gold bull run remains in full steam with a 4.2% gain in October and 33.0% YTD return.

Disappointing results and guidance from mega-cap Tech led to a retreat in the stock market on the final trading day of October. The S&P 500 declined by 0.9% for the month, bringing the YTD positive return to 21.0%. Both EAFE and EM significantly underperformed U.S. equities in October with -5.4% and -4.4% returns, respectively.

The Bureau of Economic Analysis’s (BEA) advance estimate of third quarter U.S. gross domestic product (GDP) showed the economy grew at an annualized pace of 2.8%, and the Atlanta Fed’s GDP estimate for fourth quarter GDP is 2.3%. Fed hikes are designed to cool the economy. However, GDP growth remains above potential, and the Fed hikes have not (yet?) slowed down consumer and capex spending. Apollo Chief Economist Torsten Stok sees three reasons: the U.S. economy has been less sensitive to interest rate increases because consumers and businesses locked in low interest rates during the pandemic, the U.S. economy continues to experience a structural boom in AI and data centers, and fiscal policy is easy with a 6% budget deficit driven by the CHIPS Act, the IRA, the Infrastructure Act, and defense spending. These tailwinds have offset the negative impact of Fed hikes.

October Asset Class Performance

Strong earnings and the dis-inversion of the yield curve helped Financials (+2.6%) lead among Global Industry Classification Standard (GICS) sectors, with Communication Services (+1.8%) and Energy (+0.9%) also in the green. The remaining eight sectors posted negative returns for October with Health Care (-4.6%) at the bottom. Year-to-date, the top three performing sectors are Utilities (+29.1%), Communication Services (+27.7%) and Financials (+25.0%), while the three lowest performers are Energy (+8.2%), Health Care (+8.9%) and Real Estate (+10.4%).

Growth outperformed Value, with the Russell 1000 Growth down -0.3% in October (+24.1% YTD) vs. -1.1% for the Russell 1000 Value (+15.4% YTD). Over the last three years, the total return of the Large-cap Value index has lagged the total return of the Large-cap Growth Index by 7.1%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was down 1.4% in October, bringing the YTD return to +9.6%. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was down 1.8% in October, 90 basis points more than the S&P 500. Over the last three years, the ESG index is up 20.0% and 9.8% behind the S&P 500 on a total return basis.

EM equities underperformed in October, with a -4.4% total return. EM continues to lag U.S. equity returns year-to-date (+11.7%), over the last 12 months (+25.3%), and over the last 3 years (-4.2%). The EAFE equity index also underperformed in October with a -5.4% return. The index is now up 7.4% YTD, behind the U.S. and EM returns for equities.

Core personal consumption expenditures (PCE) price index, which strips out volatile food and energy items, increased 0.3% in September, and 2.7% from a year earlier, according to BEA data. Overall inflation was 2.1%, the lowest since early 2021 and just above the Fed’s 2% target. These figures, released on October 31, capped a month of upside surprises in key economic reports that will likely translate into a data dependent and cautious approach to interest-rate cuts. As expected, the Fed announced a 25 basis point cut at its November 6 and 7 policy meeting, following an initial 50 basis points cut in September.

Treasuries retreated in October with strong macro data across the board increasing the likelihood of higher for longer rates. The 10-year U.S. Treasury closed October 50 basis points wider at 4.28% vs. 3.78% at the end of September, 3.88% at the end of December 2023, and from a peak of 4.99% in October 2023. Shorter-term 2-year U.S. Treasury closed 53 basis points higher on the month at 4.17% vs. 4.25% at the end of 2023. The 2-year and 10-year Treasury yield curve dis-inverted in September, and the 10-year yield is now 11 basis points higher than the 2-year yield. The U.S. Aggregate bond index was down 2.5% in October, bringing the YTD return to 1.9%. The Municipal Bond Index was also down 1.5% in October and is up 0.8% YTD. U.S. Corporate Investment Grade and U.S. High Yield are now up 2.8% and 7.4% YTD, respectively.

As we go to press, Trump just won the 2024 presidential election, and a Republican sweep looks increasingly likely. Bond yields are rising, and equities are surging on the expectation of more growth and possibly more deficits with a red sweep.

The VIX saw the worst volatility surge since the pandemic at the beginning of August, when it traded as high as 65.7%. It has come down significantly since but remains in a higher 15-23% range than in the first half of 2024. The VIX closed October at 23.2%, compared to the post-GFC average of 18.5%. Bond market volatility surged in October, with the BofA MOVE index reaching 135%, a year-to-date high.

The gold bull run remains in full steam with another +4.2% return in October, closing at $2,744 per ounce and up +33.0% YTD, ahead of U.S. large-cap equities. Oil futures, as measured by the WTI Crude Oil $/bbl., were up 1.6% in October to $69/bbl. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, strengthened by 3.2% in October, and is now up 2.6% YTD. Bitcoin was up 9.6% in October (+64.5% YTD), while Ethereum traded down 3.7% (+10.3% YTD).

Chart of the Month – Rolling Three-Year Correlations Between the S&P 500 and EAFE/EM

In a well-diversified portfolio, the negative performance of some assets is offset by the positive performance of other assets. Positive correlation reduces this effect, making it harder to mitigate risk through diversification. To achieve effective diversification, we believe it is important to own assets with low or negative correlations so that the performance of one asset does not directly impact the performance of another.

One of the key reasons for owning non-U.S. equities is the diversification benefit. U.S. equities account for approximately 65% of the global equity market – allocations to non-U.S. equities are necessary to capture the entire global equity opportunity set and may improve the efficiency of portfolios. While EAFE is showing a correlation factor that fluctuates between 0.8 and 0.9 in the last two decades, EM has been less correlated within a 0.5 to 0.8 range. This means that EAFE may no longer add much to U.S. equity portfolios with correlations on the rise. On the other hand, EM may continue to offer some diversification benefit.

The correlation between EAFE and U.S. equities has increased over time due to globalization. The integration of global economies and markets has led to more synchronized economic cycles and corporate earnings across developed countries.

Emerging markets often have different economic structures and are at different stages of development compared to developed markets like those in the EAFE index. This leads to different growth drivers and economic cycles. EM economies are also more influenced by local factors such as political stability and domestic policies, which can differ significantly from the factors affecting developed markets. Finally, the sector composition of EM indices often differs from that of developed markets. For example, EM indices may have a higher weighting in sectors like commodities and financials.

Quote of the Month

“It’s never paid to bet against America.” – Warren Buffett

Major Asset Class Dashboard

Macro & Markets: An Update from Beacon Pointe CIO – December 12, 2024 @ 11am PT / 2pm ET

Curated by Julien Frazzo, Deputy Chief Investment Officer and Michael G. Dow, CAIA, CFA®, Chief Investment Officer

Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. This document has been prepared with the assistance of Microsoft Copilot, an AI-powered tool designed to enhance productivity and provide support in drafting, editing, and organizing content. Microsoft Copilot leverages advanced AI models to generate text based on user input. Although Copilot generates original content based on user input, there is a risk that the generated text may inadvertently resemble existing works that may not be properly cited.

November 2024

Company

Services

Press & Publications

Get Connected