The Independent Market Observer

What Mattered This Week? Markets Kept Dropping

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Oct 27, 2023 3:16:14 PM

and tagged Commentary

Leave a comment

investor analyzing market declinesThis week was about the markets, which kept dropping even as the economic news continued to be good. Growth last quarter was well above expectations, at almost 5 percent, and personal spending increased for the sixth month in a row. Despite that good news, markets pulled back again, with the S&P 500 looking like it will slide into a correction, down more than 10 percent from the most recent peak in August.

Side Effect of Economic Growth

On the face of it, that decline doesn’t seem to make much sense. But the unfortunate side effect of economic growth is that interest rates are likely to stay higher for longer—and that is just what the markets have started to realize. Interest rates stayed at almost 5 percent for the 10-year U.S. Treasury all this week and last, as markets priced in higher for longer. In turn, stock valuations, which move in the opposite direction of rates, dropped from around 20 times next year’s earnings to around 18 times. That’s a big shift and explains the market pullback.

What’s Next?

What does this mean going forward? The good news is that, at least for the moment, rates seem to have stabilized, which should limit any further valuation declines in the short term. Over the longer term, the valuation adjustment should be offset by earnings growth, which is still expected to be strong over the next several quarters.

With the economy still healthy and with earnings expected to grow, the current repricing looks like an adjustment rather than something worse. No one likes a market pullback. But with a solid economic foundation in place, we have some cushion here. The current decline, at around 10 percent, is quite normal. In fact, it’s something we typically see around once a year. Even if it gets somewhat worse, that would also be normal—and something we have seen many times before.

This Is Normal

In other words, while this wasn’t a great week for markets, this is a normal pullback that makes sense given financial conditions. From what we see right now, prospects for the market over time are still positive. And that is a good thing to remember as we finish the week.

Have a great weekend!


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®