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At a glance

Equities slipped last week as bond yields rose on fears of waning U.S. Treasury demand and uncertainty ahead of this week’s U.S. election and Federal Reserve meeting. Weather and strikes challenged U.S. payroll growth, though the unemployment rate remained flat.

Number of the week:

4.1%

The U.S. unemployment rate in October, the same as September.

Term of the week:

Institute of Supply Management Manufacturing Index

Also called the Purchasing Manager's Index, this measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms.

Quote of the week:

The S&P 500 lost 1.0% in October, with eight of 11 sectors posting losses. Overbought conditions, stretched valuations, economic uncertainty, looming national elections and the Federal Reserve interest rate decision this week are among items weighing on sentiment.

― Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank

Global economy

Quick take: Weather and strike-related challenges hurt the October jobs report, but solid consumer confidence and low unemployment support the ongoing economic expansion. The European economy continues its modest growth, though inflation pressures edged higher.

Our view: Growth in the United States and India remains exceptional while other major economies, including China, Europe, Japan and the United Kingdom demonstrate modest but positive economic expansion despite elevated interest rates. Slowing growth and inflation trends are likely to persist well into 2025 due to lagged effects of high borrowing costs.

  • Hurricanes and the Boeing strike dampened non-farm payroll gains in October, up just 12,000 jobs, and August and September reports were revised lower by a combined 112,000. The events had less impact on the household survey, with the unemployment rate of 4.1% unchanged relative to September and average hourly earnings rising 4.0% year-over-year. The labor market is moderating; investors await some clarity on payroll growth as we put the weather-related challenges behind us. A surge in the Conference Board Consumer Confidence Index to the highest level since the start of 2024 helped investor sentiment.
  • The gross domestic product advanced 2.8% annualized in the third quarter, slightly slower than the 3% pace in the second quarter. However, consumer spending rose 3.7%, improving from the 2.8% second quarter. Headline inflation pressures eased, with the Personal Consumption Expenditure Inflation Index (PCE) slowing 0.1% to 2.1% year-over-year in September. Core PCE, the Federal Reserve’s (Fed) focus, which excludes volatile food and energy components, was unchanged from August, rising 2.7% year-over-year.
  • The U.S. Institute of Supply Management Manufacturing Purchasing Manager Index slipped 0.7 points in October, now indicating contracting activity for 23 of the past 24 months. The index saw slight easing of pressure on employment and new orders while inventories remain low. U.S. manufacturing activity remains stuck neutral, awaiting further interest rate cuts from the Federal Reserve to ease lending conditions.
  • The eurozone gross domestic product rose 0.4% in the third quarter, improving from 0.2% in the second quarter, helped by a rebound in Germany. The region continues to struggle amid a manufacturing contraction and flat consumer spending, gaining just 0.9% over the past year. However, inflation remains a challenge; consumer prices rose 2% year-over-year in October, accelerating from 1.7% in September.

Equity markets

Quick take: The S&P 500 ended October in modest retreat mode while third quarter corporate results trend above expectations and election outcomes loom.

Our view: The fundamental backdrop remains supportive of a risk-on (more aggressive) bias. Inflation is falling, interest rate cuts are in motion and earnings are trending higher. Near-term, price volatility is likely to be more the norm, with elevated valuations, election-related nuances and ongoing geopolitical tensions.

  • S&P 500 year-to-date performance remains superb and broad-based, but October was subdued. The S&P 500 is up 19.6% for the year through October 31, with all 11 sectors in positive territory, seven of which are up 11% or more. Communication Services, Financials, Information Technology and Utilities are leading sector performance, up between 23.5% and 30.2%. In October, performance trends were less sanguine. The S&P 500 lost 1.0%, with eight of 11 sectors posting losses. Overbought conditions, stretched valuations, economic uncertainty, looming national elections and this week’s Fed meeting are weighing on sentiment.
  • Broad market valuations are elevated. Consensus expectations are for S&P 500 earnings of roughly $240 per share for 2024 and $275 in 2025, according to Bloomberg, FactSet and S&P Cap IQ. This reflects robust 14.0% growth in 2025 over 2024 projected levels. At present, the S&P 500 trades at 24.1 times last 12-month estimates and 21.2 times next 12-month estimates, both at the high side of its historical average.
  • Third quarter results are outpacing low expectations. As of Friday’s close, 70% of S&P 500 companies have released results. Sales are trending up 5.1% versus expectations of 4.4%. Earnings are advancing a more robust 8.3% versus expectations of 3.9%.
  • Consumer and business spending remains resilient; trends are in line with pre-pandemic levels. Banks, credit card companies and airlines report overall consumer spending remains solid, with trends normalizing versus deteriorating. Big-box retail company reports later his month should add insight into spending trends among various income groups. Industrial demand remains weak, partially attributed to slow China-related sales and election-related uncertainty. Technology-related capital expenditures remain robust with no evidence of slowing, fueled by strong demand for cloud computing and generative artificial intelligence.

Bond markets

Quick take: Short-term Treasury yields fell in anticipation of the Fed cutting interest rates on Thursday while long-term Treasury yields rose with election uncertainty potentially hindering investor demand.

Our view: High-quality bonds offer meaningful yields that fairly compensate for growth, inflation and monetary policy uncertainties, though the election and Fed meeting this week may fuel temporary bond price swings. Allocations to high-quality bonds with supplemental exposures spread across riskier high yield bonds, high quality structured credit, non-agency mortgages, and reinsurance result in well-diversified fixed income exposures with meaningful return potential.

  • Elections put fiscal policy on center stage this week for Treasury investors. Federal government stimulus necessitates Treasury issuance to fund deficit spending. Additional Treasury bond supply can push yields higher (prices lower) to entice sufficient investor demand to purchase government debt. The fiscal deficit is currently larger than normal, but thus far investors have absorbed Treasury supply with limited market disruption. Treasury auctions over the past few months show some signs of weaker demand. However, the U.S. Treasury plans to keep medium- and long-term bond issuance stable over coming quarters. Treasury yields adequately compensate for expected Treasury supply, but bonds may experience near-term price swings as investors digest election outcomes.
  • Bond yields reflect a 0.25% fed funds rate cut on Thursday. The Fed started the gradual process of returning its restrictive rate policy stance to a more neutral setting with a 0.50% rate cut in September. The Fed is poised to deliver another 0.25% cut this week, and the market expects a high likelihood of an additional 0.25% cut at the Fed’s December meeting. Recent bond yield gains reflect investor expectations that the Fed will cut rates at a slower pace in 2025. Chairman Jerome Powell’s post-meeting press conference will draw attention.
  • Corporate bonds continue to deliver steady returns despite expensive valuations. Strong investor demand for the extra yield available on corporate bonds over Treasuries continues to support prices. Municipal bonds recently faced greater issuance headwinds but offer attractive yield opportunities for taxable investors. Non-agency mortgages, highly rated structured credit and reinsurance also offer opportunities to increase income relative to traditional high-quality bond allocations.

Real assets

Quick take: Interest rate-sensitive assets like publicly traded real estate companies and Utilities stocks fell as bond yields rose last week. Broad U.S. Real Estate indices were down more than 2.5% and Utilities lost around 2.8% as 10-year Treasury yields rose 0.13% to 4.38%. Global infrastructure, which has a heavy weighting to Utilities, was also down. Commodities were down approximately 2.4% as Energy-related commodities fell.

Our view: Real asset categories such as publicly traded real estate present opportunities to generate meaningful current income with potential price support from Fed rate cuts ahead. Commodity prices remain stagnant year-to-date but can serve as a hedge against rising inflation.

  • Real estate fell last week as Treasury yields rose. The approximate 2.6% decline underperformed the broader market and largely offset prior week gains. Real Estate is typically more sensitive to interest rate (funding cost) changes than other asset categories. Subsectors such as telecom towers, multifamily and single-family residences, and offices were all down more than 4%. Healthcare was the only subcategory generating gains. Residential home prices continue to rise modestly, with S&P CoreLogic Case-Shiller Home Price Index rising 4.25% year-over-year in August. A narrower measure that tracks 20 large cities rose 5.2%. Ongoing home price appreciation exceeding income growth, paired with high mortgage rates, is keeping home affordability a challenge for many potential buyers.
  • Natural gas prices declined again last week, with warmer winter forecasts suggesting lower near-term demand. Oil prices also fell. The Organization of Petroleum Exporting Countries (OPEC) increased production in October, according to a Bloomberg survey. Production in Libya increased considerably after a short-term pause when oil fields restarted, and export facilities came back online after recent political standoff. Gold prices were down slightly last week but remain up over the past one- and three-month periods.
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Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Institute of Supply Management Manufacturing Index, also called the Purchasing Manager's Index, measures manufacturing activity based on a monthly survey, conducted by the Institute for Supply Management, of purchasing managers at more than 300 manufacturing firms. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. The Conference Board is a nonprofit research organization that distributes vital economic information to its peer-to-peer business members. The S&P CoreLogic Case-Shiller Home Price Index measures the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated monthly.

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This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.