After declining over 9% in September, the S&P 500 gained 8.1% during October. Likewise, the Russell 2000 Index of small cap stocks reversed direction, gaining 11.2% during October after declining 9.7% in September. In the bond markets, high yield corporate bonds outperformed as credit spreads tightened. However, investment grade bonds produced a slight loss as Treasury yields continued to move higher. As we have discussed in our previous commentaries, we attribute this stock and bond market volatility to investor uncertainty, and perhaps anxiety over the Federal Reserve’s interest rate policy.
The October equity market rally was driven by the concept of a “Fed pivot”, which is defined as reversal in the Federal Reserve raising interest rates. 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 a lower terminal rate. 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.
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