A trader works at the New York Stock Exchange (NYSE) in New York City, U.S., October 27, 2023. REUTERS/Brendan McDermid Acquire license rights
NEW YORK, Oct 27 (Reuters) - Financial markets are gearing up for what could be a momentous week, with a Federal Reserve meeting, U.S. jobs data and earnings from tech giant Apple Inc. (AAPL.O) possibly setting the course for stocks and bonds the rest of the year.
October has lived up to its reputation for volatility, as a rise in Treasury yields and geopolitical uncertainty pressured stocks. The S&P 500 index (.SPX) is down 3.5% for the month, adding to losses that have left it more than 10% off its late-July high.
Whether the road remains rocky for the rest of 2023 may largely depend on the bond market. The Federal Reserve's stance on "higher for longer" interest rates and growing fiscal concerns in the United States pushed the benchmark 10-year Treasury yield - which moves inversely to prices - to 5% before this month, the highest level since 2007. Higher Treasury yields are seen as a With the wind against to stocks, in part because they compete with stocks for buyers.
Investors are concerned that yields could upload more whether the Federal Reserve reinforces its hawkish message at the central bank's Nov. 1 policy meeting. Strong U.S. jobs data next Friday could also be a catalyst for yields to rise if they strengthen the case for keeping rates elevated to cool the economy and prevent inflation from picking up.
"Stocks will begin to rally when the market believes bond yields have peaked," said Sam Stovall, chief investment strategist at CFRA Research.
Overall, futures markets are pricing in a near certainty that the Federal Reserve will not raise rates in November, and a nearly 80% chance that the central bank will keep rates steady in December, according to CME's FedWatch tool. . Still, authorities have projected that they will keep the official interest rate at current levels for most of 2024, longer than markets had previously anticipated.
Investors are playing a "waiting game about how much each economic data point needs to rise to put another rate hike back on the table," said Alex McGrath, chief investment officer at NorthEnd Private Wealth.
With the growth of the United States Gross Domestic Product at a level sizzling 4.9% In the third quarter, signs that the labor market remains too active or that the Federal Reserve sees the need for further tightening to control inflation could fuel greater volatility.
"It feels like we're at a crossroads about whether or not the strong growth we've seen over the summer months will continue into the fourth quarter" and keeps concerns bubbling over inflation and tight monetary policy, said Charlie Ripley, senior strategist at investments from Allianz Investment Management.
Adding to bond market concerns, the Treasury is expected to announce the size of its upcoming auctions later this week. Concerns about a growing federal deficit and increased supply have helped boost yields.
Investors are also awaiting Apple's results on Thursday, in an earnings season with disappointments from some growth and technology giants, including Tesla and Google. The tech-heavy Nasdaq 100 index is down 11% from its peak, although it is still up nearly 30% so far this year.
Some investors believe the worst of the selling may be over.
A stock market rally would follow seasonal trends, said Stovall of CFRA Research. Since 1945, the S&P 500 has advanced an average of 1.5% in November, making it the third-best performing month of the year, he said.
More broadly, some believe that stock market trading patterns this year point to a recovery in the fourth quarter.
In the 14 cases in which the S&P 500 gained at least 10% through July and then fell in August, as it did this year, the index rose each time during the final four months of the year, according to Ned Davis Research. The average profit in those cases has been 10%.
Stocks appear "oversold" based on technical indicators and could rally if economic data turns out as expected, said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.
"The stock market is primed for a rally late in the fourth quarter."
Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang
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