Michael Reinking (00:05):
Good morning. I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and you are listening to the Market Storylines podcast on the inside the Ice House podcast feed. As always, I want to thank everyone for tuning in and offer a special thank you to my friend Jay Woods, chief market strategist at Freedom Capital for filling in last week. Since we just wrapped up Q3, we decided to go with a slightly different format, taking a step back to discuss the storylines of the past quarter and prepare you for the key topics as we look out to the end of the year. So let's get to it.
Michael Reinking (00:41):
Coming into Q3, the s and p 500 had been rallying pretty much unabated off of the October, 2023 low, moving up around 25% over that timeframe to start the quarter. Markets did pull back as inflation data continued to come in hotter than expected, sending rates higher and pushing out expectations for the Fed to begin its easing cycle. However, that pullback quickly ran its course, helped by a solid corporate earning season. Rates also pulled back as economic data moderated, and there was an improvement in treasury supply and demand dynamics with the treasury skewing issuance in favor of bills instead of longer dated treasuries, and the Fed throttling down the pace of qt. Now, the string of new all time highs continued into the summer, extending the longest streak since before the financial crisis without a 2% decline in the s and p 500 in a single session while the VIX consistently held below 15.
Michael Reinking (01:37):
However, that came to a screeching halt at the end of July. The tremors began as a rotation, got underway following the June CPI report, which came in better than expected, opening the door for the Federal Reserve to begin cutting rates. Then at the end of the month, the evening after the Fed left rates on hold, the Bank of Japan surprise markets by hiking rates earlier than expected, which began the unwind of carry trades. This was followed by a week jobs report that Friday triggering calls that the Federal Reserve was behind the curve and a sharp selloff into the weekend ensued with the VIX approaching 30 that Friday. Now, over the weekend, as the yen continued to strengthen, the NI K fell over 10%, bringing losses to around 20%, and multiple Asian markets triggered market wide circuit breakers. US markets gapped down that Monday morning nearly 5%, bringing the peak to trough decline from the July high to about 10% with the VIX surging to levels not seen since the pandemic.
Michael Reinking (02:33):
As we discussed in our inaugural market storylines podcast, we felt the violent price action was mostly related to the unwinding of crowded positioning, which had built up during the low volatility environment as opposed to a significant negative shift in the overarching backdrop, Monday's selloff ended up marking the low and the rebound happened faster than even I had expected. In the days ahead officials from the A BOJ calmed fears, aggressive tightening. The economic data continued to point to resilience, not suggesting the economy had suddenly fallen off a cliff and the Federal Reserve signaled that it would begin its easing cycle with equities retesting all time highs again, within a couple of weeks heading into September, much was made of the negative seasonal patterns, and once again, there was a bit of volatility in anticipation of the jobs report. That report showed an improvement from July, but markets closed that Friday on the dead lows, bringing back some feelings of deja vu to the start of August.
Michael Reinking (03:29):
However, this time around there was no overseas weakness and equities began to recover following a solid retail sales report and inflation data that continued to point to a moderation, markets seemed to get more comfortable with the idea of a 25 basis point rate Cut. However, some well-placed quotes in the media made it apparent that a 50 basis point cut was indeed on the table and Chair Powell delivered just that the following week, which pushed equities back to fresh all time highs again. Now, September ended on a positive note closing up just over 2%. The first gain in the month since 2019 Q3 was the fourth consecutive positive quarter up just over 5% bringing year to date gains to around 20%. Now, by all accounts, it's been a very solid start to the year. So what is going to drive markets in Q4? You ask? Well, once again, the quarter has gotten off to a bit of a rocky start this time, mostly related to the increasing geopolitical risks as tensions in the Middle East have once again escalated.
Michael Reinking (04:30):
So that is currently top of mind. Beyond that, there are a few things that I am watching. Economic data, corporate earnings, China, and obviously the election in terms of economic data markets have become hypersensitive to incoming data, particularly on the growth side of the equation. With the fed's recent shift labor market data. The first Friday of the month will be key. The Q2 earnings season unofficially kicks off at the end of next week with major financials beginning to report. Investors will be listening closely for signs that the environment is shifting. Now, over the last week, China has unleashed an aggressive policy response to try and spur economic activity, address property market concerns and stabilize markets. Now, this has triggered a sharp rally in local markets, which are up over 20% over the last week. Now, the country has been at the epicenter of global growth concerns and has negatively impacted earnings of global corporations, particularly in Europe, which are more exposed.
Michael Reinking (05:27):
It'll be interesting to see the impact of these policy changes in the weeks ahead, and this has also put a bid beneath commodity markets, so it's something to pay attention to on the inflation front. And finally, we have the election, which is now only weeks away. Historically, the weeks leading into the election tend to be volatile with the month of October the worst month during election year since 1970, falling by an average of just over 1%, but it has only ended lower about half of the time. But this leads into a end of the year as some of the uncertainty is removed. And I love the stat that Jay shared last week highlighting when markets make a new all time high in September that historically has led to further gains in the final quarter of the year. So clearly there's plenty to follow in the weeks ahead, and I consider an honor to take that journey with you. Thank you very much for spending some time with us today. Remember to tune in every Friday to the Market Storylines podcast on the inside the icehouse podcast, feed and rate review, and subscribe wherever you get your podcast. Thank you for listening. I'm Michael Reinking. I'll talk to you again next week.
Speaker 2 (06:33):
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ice nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of.