October 2022

by Clare Market Investments on Nov 2, 2022

Monthly Market Summary

Stock Market Rebounds After September Sell-Off
The S&P 500 Index returned +8.1% during October, underperforming the Russell 2000 Index’s +11.2% return.
Energy (+25%) was the top-performing sector as the price of oil rose +8.9%, with Industrials (+13.9%) and Financials (+11.9%) the second and third best performers. Defensive sectors underperformed the market rally during October, with Real Estate (+2%), Utilities (+1.9%), and Communication Services (+0.7%).
Corporate investment grade bonds generated a -0.7% total return, underperforming corporate high yield bonds’ +3.3% total return.
The MSCI EAFE Index of global developed market stocks returned +5.9% in October, outperforming the MSCI Emerging Market Index’s -2% return.

Equity Market Rebounds After September Sell-Off

Stock markets remained volatile in October, changing direction as investors shifted their views. After declining -9.2% during September, the S&P 500 gained +8.1% during October. Likewise, the Russell 2000 Index of small cap stocks reversed direction, returning +11.2% during October after declining -9.7% during September. In the credit market, high yield corporate bonds outperformed as credit spreads tightened, while investment grade bonds produced a slight loss as Treasury yields continued to move higher. A comparison of September and October performance trends highlights the sharp reversal in market sentiment and the resulting risk-on market rally.

Uncertain Federal Reserve Policy Continues to Drive Market Volatility

Increased stock and bond market volatility is attributed to uncertain Federal Reserve policy. Why? The terminal rate, which represents the forecasted rate at which interest rate hikes will stop, constantly changes as new information is available. A higher terminal rate is more restrictive on economic activity and implies lower stock valuations, while a lower terminal rate is less economically restrictive and implies higher stock valuations. As the market’s terminal rate forecast moves up and down, stocks and bonds also move to price in the new terminal rate. It’s a messy process.

The October equity market rally was driven by the concept of a ‘Fed pivot’, which is defined as a reversal in Federal Reserve policy. The pivot concept gained steam recently as Fed officials started to debate when and how to stop raising interest rates, which the market interpreted as fewer rate hikes and a lower terminal rate. Stocks traded higher as the market priced in a lower terminal rate. Is the new projected terminal rate correct? It’s difficult to say, and the market likely isn’t done guessing. Until the direction of Fed policy is clearer, the market’s projected terminal rate will continue to fluctuate. This means volatility could remain elevated in coming months.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

IMPORTANT DISCLOSURES

Clare Market Investments, LLC is a Registered Investment Advisor. This material is for informational purposes only. It is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a recommendation to buy a security. This summary is based exclusively on an analysis of general market conditions and does not speak to the suitability of any specific proposed securities transaction or investment strategy. Judgement or recommendations found in this report may differ materially from what may be presented in a long-term investment plan and are subject to change at any time. This report’s authors will not advise you as to any changes in figures or views found in this report. Investors should consult with their investment advisor to determine the appropriate investment strategy and investment vehicle. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. Except for the historical information contained in this report, certain matters are forward-looking statements or projections that are dependent upon risks and uncertainties, including but not limited to such factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle. See claremarket.com for additional information and disclosures.

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- Benjamin Graham