Market Wrap – October 2024

This is a brief review with a focus on key trends. More detailed information, including macroeconomic statistics and key events, is presented in the weekly reviews.

Executive Summary

In October, the U.S. stock market rally paused, with major indices declining between 0.5% and 1.5% as volatility surged by 38%. An ambiguous economic outlook, mixed earnings from the Magnificent 7, and pre-election jitters shifted sentiment to risk-off after six consecutive weeks of gains. The largest declines were in U.S. small-caps (-2.6%) and developed markets outside the U.S., which posted losses exceeding 5%.

Only three out of eleven sectors saw positive performance, with Health Care becoming the second sector, alongside Energy, to achieve single-digit growth year-to-date. Part of this month’s movement is attributed to Donald Trump’s rising election odds, as his potential victory is viewed as favorable for Energy (+0.9%) and Financials (+2.6%), but less so for Health Care (-4.6%), where Kamala Harris, if elected, may increase capital requirements for big banks and extend ACA subsidies for health insurance.

Global stock markets declined sharply, with the global ex-U.S. index down 4.6%, largely driven by a 3.2% strengthening of the U.S. dollar. Analysts view Trump’s economic policies as inflationary, which has led to higher U.S. Treasury yields and a stronger dollar.

In response to potential fiscal policies under a Trump administration and stronger-than-expected U.S. labor market data in early October, investors have revised interest rate expectations. The projected end-of-year Fed rates for 2024 and 2025 have increased by 19 and 67 basis points, respectively, from September. The U.S. Treasury yield curve has flattened significantly, with 10-year bond yields rising by 47 basis points to 4.28% and 30-year bond yields up 33 basis points to 4.47%.

US Stock Market

In October, the U.S. stock market rally halted, with major indices declining between 0.5% and 1.5%, while volatility surged by 38%. The ambiguous state of the U.S. economy, mixed earnings from the "Magnificent 7," and pre-election jitters triggered a shift to a risk-off sentiment after six consecutive weeks of gains. Across market segments, the largest declines were in U.S. small-caps (-2.6% over the month) and developed markets outside the U.S., which posted losses of over 5%.

Year-to-date, large-cap growth has continued to outperform small- and mid-cap segments.

According to Morningstar's calculations, the U.S. stock market is now trading at a 2% premium to its fair value, down slightly from a 3% overvaluation at the end of September. After the recent month, the small-cap value category remains the most attractive, trading at a 26% discount to fair value (up from a 25% discount a month ago), while large-cap growth stocks are the most overvalued, with a 16% premium (up from 14%).

Just three out of eleven sectors posted positive dynamics, with Health Care becoming the second sector with single-digit growth year-to-date, alongside Energy. Part of the monthly dynamics can be attributed to Donald Trump’s rising chances of returning to the White House, as his potential win is seen as positive for Energy (+0.9% over the month), while Kamala Harris may increase capital requirements for big banks (Financials +2.6%) and extend ACA subsidies for health insurance (Health Care -4.6%).

According to our calculations, the Magnificent 7 accounted for 48% of the year-to-date growth of the S&P 500 Index (with half attributed solely to NVDA), up from 45% a month ago. In relative terms, the market cap of these stocks rose by 34.1%, while the value of the remaining 493 stocks increased by 14.6%. In September, these figures were 34.0% and 16.2%, respectively.

Global Markets

Global stock markets performed strongly negative, with the global ex-U.S. index down 4.6%. However, a 3.2% strengthening of the U.S. dollar was the main driver of this dynamic, as Trump’s economic agenda is considered inflationary by analysts, leading to a rise in U.S. Treasury yields and gains for the dollar.

Debt and Fixed Income Markets

According to CME data, the implied Fed Funds rate curve for the next 18 months (until April 2026) has shifted upward by an average of 56 basis points. This adjustment is attributed to the potential fiscal policies of a Trump administration and stronger-than-expected U.S. labor market statistics in early October.

In response, the U.S. Treasury yield curve has significantly flattened, with 10-year bond yields surging by 47 basis points to 4.28% and 30-year bond yields rising by 33 basis points to 4.47%.

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