Fed Meeting: Watch What They Say Versus What They Do (or Don’t Do)

Performance for Week Ending 10.27.2023:

The Dow Jones Industrial Average (Dow) finished off 2.14%, the Standard & Poor’s 500 Index (S&P 500) lost 2.53% and the Nasdaq Composite Index (NASDAQ) fell 2.62%. Sector breadth was negative with 10 of the 11 S&P sector groups closing lower. The Communication Services (-6.29%) sector was the worst performer followed by Energy (-6.15%) and Healthcare (-3.87%). On the upside the Utility sector (+1.24%) was the sole winner.

*See below for Index Definitions

MARKET OBSERVATIONS: 10/23/23  – 10/27/23

Stocks finished the week lower reflecting geopolitical concerns, a batch of mixed third quarter earnings reports, and strong economic data that underscored the Fed is likely to keep rates higher for longer. The recent market weakness has resulted in some technical damage, with the S&P 500 Index breaking below some key support levels (i.e., levels where selling pressure has dried up in the past). The next major area of support comes into play at the 3940 level, which represents the 200-week moving average, a level that has often halted selloffs over the past decade.

Economic Roundup: It was a relatively quiet and backend loaded week for economic data, with the closely watched “core” personal consumption and expenditures (PCE) inflation data released on Friday. Core PCE is the preferred inflation barometer for the Federal Reserve. The report showed core PCE inflation rising 0.3% during September and by 3.7% from a year ago. Both were right on target with economists’ expectations. Earlier in the week, the Commerce Department reported that the US economy grew at the fastest pace in nearly two years during the third quarter due to a burst of consumer spending. Q3 GDP accelerated to a 4.9% annualized rate, more than double the second-quarter pace. The economy’s main growth engine — personal spending — jumped 4%, also the most since 2021. Meanwhile, the S&P Global flash composite output index advanced to a three-month-high showing a pickup in business activity picked up in October after back-to-back months of stagnation. Factories registered new order growth for the first time since April, and business activity at service providers also improved. The composite gauge of selling prices fell to a three-year low, driven by a pullback in inflationary pressures at service providers. Elsewhere, new home sales jumped 12.3% m/m in September to a seasonally adjusted annual rate of 759K, well above the consensus forecast of 680K. New home sales have been resilient despite a rise in mortgage rates to a 23-year high. With the supply of existing homes for sale extremely tight, homebuilders continue to see an opportunity to generate sales by providing incentives such as price cuts or mortgage rate buydowns. Close to two-thirds of builders reported offering some type of incentive to boost sales.

Q3 Earnings Season: Despite some high-profile one-off earnings disappointments, third quarter earnings are still tracking at a better than feared pace. Through Friday, 246 members of the S&P 500 have reported results with nearly 79% beating expectations. Aggregate earnings for the group are up 5.8%, solidly ahead of the 0.7% decline that the Bloomberg consensus was forecasting at the start of reporting season. On the sector front, Consumer Discretionary has delivered the strongest growth while the Energy sector has delivered the weakest. According to Bloomberg data, the earnings environment is set to improve in the coming year with 2024 S&P 500 earnings growth estimated at 11.7% for the year followed by 12.6% during 2025.

The Week Ahead: The focal point for the week will be the two-day Federal Open Market Committee meeting on Tuesday and Wednesday. While it’s all but a done deal that the Fed will hold rates steady at the meeting, the market will be paying more attention to what they say versus what they do. Based on recent speeches from Fed Chair Powell and several Fed Presidents, there is building expectation that the Fed could pivot to a more dovish stance. On the data front, labor market indicators will be closely watched, including the monthly payroll report on Friday as well as the ADP Employment Change and JOLTS Job Openings reports on Wednesday. In terms of the October payroll report, economists are forecasting that nonfarm payrolls will expand by 180K, and the unemployment rate will hold steady at 3.8%. Apart from the labor market gauges, the focus will also be on the ISM indices, including the manufacturing gauge on Wednesday and the services one on Friday. Earnings season will also remain front and center with 156 members of the S&P 500 scheduled to release results. Amongst this group will be tech-bellwether Apple Inc. on Thursday.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.