Key Takeaways:
- Volatility spiked in October as the FAANG stocks came back to earth
- The US economy continues to look solid, gaining 3.5% in the third quarter
- Yields increased across all Treasury securities during the month as investors focus on the next moves by the Federal Reserve
October was a scary market for stocks. All the major stock indexes saw steep declines in a risk-off/risk-on frenzy that traded on the news of the hour. The FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) had risen to extraordinary heights leading up to October and quite simply may have gotten too expensive. Amazon stock dropped by more than 5% four days in October, wiping out $163B in market cap from their peak after reporting slower sales for Q3 and lower guidance for the fourth quarter. Netflix dropped 19% after reporting lower subscriber growth. Facebook and Google stocks suffered as they grapple with privacy issues of their large user bases. These large growth stocks had been overshooting their fundamentals, so the selloff seemed warranted.
Expectations for potentially slower economic and profit growth brought down the S&P500 6.84% in October. Growth stocks dropped 8.94% while value names held up better, down 5.18%. Small caps were also hit particularly hard down 10.86% for the month. Expectations for higher interest rates are likely getting factored in as companies will need to refinance their debt at higher rates. The only positive sectors for the month were the usual suspects during market selloffs: utilities (+1.95%) and consumer staples (+2.31%). Midterm elections, rising inflation, and higher interest rates make us believe that volatility will be higher over the next 12 months.
International markets followed the US down with developed markets losing 7.96% while emerging markets lost 8.71%. International investment has been hurt by the stagnant growth in the Eurozone, a strong US dollar and uncertainty in global trade. Should we see an agreement on trade with the US and China, global equities will likely rally but we wouldn’t hold our breath. Long-term investors who can stomach the volatility will find value in international stocks as they are trading at multiples below their 20-year averages and much cheaper than domestic stocks.
Concerns about a more hawkish Federal Reserve forced yields across all Treasury securities to rise in October. 30-year treasury yields saw the largest increase closing at 3.4% from a prior close of 3.23% in September. The investment grade bond market lost 0.79% while high yield bonds dropped 1.6% as credit spreads widened. Higher interest rates may cause defaults to increase as highly leveraged companies will need to refinance at higher rates. With a relatively flat yield curve (short-term yields not far below long-term yields) we favor the short end of the yield curve.
Please contact any member of the Bernardo Wealth Planning Team if you have any questions.
Commentary by:
Bill Roth, CFA
Investment Director
Sources: Bloomberg, Morningstar, Wall Street Journal