Market Recap – Week Ending Oct. 11

U.S. Stocks Higher; Third-Quarter Earnings Reports

Overview: Stocks continued to march higher last week in the U.S. as the S&P 500 index recorded its 45th all-time high of the year Friday, closing the week 1.1% higher. Outside the U.S., emerging market stocks (MSCI EM) declined 1.7%, drug down by the China Hang Seng index, which fell 6.5% on the week. Inflation data was mixed, with headline consumer prices (CPI) falling from 2.5% in August to 2.4% in September, while core CPI rose 3.3% year-over-year, slightly higher than expected. On the Federal Reserve front, minutes reported from the latest meeting showed majority support across participants for the decision to lower the funds rate by 50bp (0.50%). At the same time,  policymakers noted the 50bp rate cut should not be interpreted “as a signal that the pace of policy easing would be more rapid than participants’ assessments” in the recent summary data. In bonds, yields rose across the curve, with the 2-year and 10-year Treasury notes finishing the week at yields of 3.94% and 4.07%, respectively. Market participants are now pricing in two more 25bp rate cuts for the remainder of the year, down from three last week, and yields have adjusted, with both the 2-year and 10-year yields higher by about 30bp for October. Looking ahead to this week, bank earnings will continue with Goldman Sachs and Bank America reported ahead of the market open on Tuesday. Investors will look for signs of recovery in banking profits to continue to fuel valuations, along with earnings from heavyweights such as Johnson & Johnson, Netflix, United Airlines and Proctor & Gamble, who will all report third-quarter earnings this week. On the data front, September retail sales and industrial production figures are due Thursday, with data on housing starts and building permits reporting Friday.

Update on the Middle East War and Oil Prices (from JP Morgan): In late September, Israel launched an offensive into Lebanon against the Iranian-backed militant group Hezbollah. In response, Iran fired 200 ballistic missiles at Tel Aviv. Israel has vowed to retaliate. Along with devastating humanitarian consequences, further escalation could spike oil prices. While a sustained geopolitical premium does seem warranted, the impact on the crude market may be muted. Currently, analysts believe Israel will target Iran’s missile rather than energy facilities. After all, the U.S. is far more interested in disrupting Iran’s military capabilities than global oil markets, especially ahead of an election. But should Iranian production take a hit, the market still appears well positioned to absorb the shock. While conflicts like the Iranian Revolution in 1978 caused crippling supply disruptions, the region’s share of the market has declined significantly. Around 65% of supply now comes from non-OPEC countries, and the U.S. is the world’s largest producer of oil. Additionally, OPEC itself has excess production capacity of about five million barrels, or 6% of current supply. Member nations are planning on reviving 2.2mbd of capacity over the course of 2025 and would likely ramp up sooner should prices spike. While the fog of war is clouding the future, modern-day oil markets are resilient. Prices fell back quickly after the Russian invasion of Ukraine and then again after Hamas’s initial attack on Israel. Nevertheless, geopolitical risk is highly elevated. Those who wish to hedge should consider investments with exposure to areas like the defense sector or global transport.