2023 | November 6

The Markets

Stocks Rebound

U.S. stock indexes posted their biggest weekly gains of 2023, reversing course just a week after the S&P 500 and the NASDAQ entered correction territory following recent declines. The NASDAQ surged 6.6%, the S&P 500 added 5.9%, and the Dow rose 5.1%.

A U.S. small-cap stock benchmark, the Russell 2000 Index, climbed nearly 8% for the week, outpacing the sizable gains for its large-cap peers. The Russell 2000’s surge left the index slightly positive year to date; just a week earlier, it had fallen to its lowest level in nearly three years

A shift in the U.S. interest-rate outlook triggered big weekly moves in the bond market, as yields of U.S. Treasuries fell, interrupting the trend of sharply rising yields seen over the past seven months. The yield of the 10-year U.S. Treasury bond fell to 4.52% on Friday, down from 4.83% the previous week; the 2- and 10-year yields fell well below their roughly 5.00% levels of the previous week.

Stocks climbed following Friday’s jobs report, which showed a labor market cooldown that could leave the U.S. Federal Reserve less inclined to raise interest rates again in the short term. In October, the economy generated 150,000 new jobs—about half as many as in September and down from an average of 258,000 over the last 12 months. October’s unemployment rate edged upward to 3.9%. 

The U.S. Federal Reserve again kept interest rates unchanged—but at the highest level since 2001—while not foreclosing the possibility of approving another rate hike at its mid-December meeting. The central bank has now held rates steady for two meetings in a row, marking the longest period without an increase since the Fed began to lift rates from a near-zero level in March 2022. 

U.S. stock indexes fell for the third month in a row in October, with the Dow slipping 1.4%, the S&P 500 2.2%, and the NASDAQ 2.8%. October’s results marked stocks’ first three-month losing streak since early 2020, and the S&P 500’s October 31 closing level was 8.6% below its year-to-date peak reached on July 31. 

Absent this year’s strong gains for a group of just seven large, technology-oriented U.S. companies, the S&P 500’s year-to-date total return through the end of October would still be positive—but only barely. The S&P 500’s total return as of October 31 was 10.69%, including that group of seven; without them, the index’s return was a mere 0.03%, according to S&P Dow Jones Indices.

In a week of strong gains for U.S. stocks, an index that measures investors’ expectations of short-term market volatility dropped sharply. The CBOE Volatility Index (VIX) fell 30% to the lowest level in a month and a half. 

Source: John Hancock Investment Management

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Predictions vs. Reality

It is notoriously difficult to predict the future, but that doesn’t stop people from trying. In 1904, a banker advised Horace Rackham not to invest in the new Ford Motor Company because, “The horse is here to stay, but the automobile is only a novelty — a fad.” Fortunately for Rackham, he was persuaded otherwise.

In 1950, the New York Time’s science reporter predicted a revolution in house cleaning by 2000. Since everything in a home would be made of synthetic fibers, cleaning would require a hose, some detergent, and a few well-placed drains. While many things in homes are made of synthetic materials, hosing down the interior is not a practical method for cleaning.

One problem with predicting the future is that forecasts are based on current knowledge – and unexpected things happen all the time. For example, during the past three years, we’ve experienced a few unexpected events:

• A pandemic that caused economies to lockdown around the world,
• A war in Ukraine that caused a sharp increase in energy prices,
• Aggressive central bank tightening in many countries,
• A war in Israel that could expand into the Middle East, and
• Harry Styles on the cover of Better Homes & Gardens.

To get an idea of how difficult forecasting is, let’s step back in time to 2020. In January 2020, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: 2020 to 2030. The CBO forecast the U.S. economy would grow 2.2% in 2020, and unemployment would be 3.5%. Then the COVID-19 pandemic arrived, and the economy went on lockdown. By the end of 2020, the economy had shrunk by 2.2%, and unemployment had risen to 8.1%.

Notes: The table includes the latest data available for 2023. Inflation shows the 12 months through December for 2020 and through September for 2023. Unemployment shows data for December 2020 and October 2023. The 2020 10-year U.S. Treasury rate is as of December 31, 2020. The 2023 10-year U.S. Treasury rate is as of November 3, 2023.

Forecasting proved to be challenging in 2023, too, as the table shows. At the start of the year, the CBO expected economic growth to be very weak (0.3%), following aggressive Federal Reserve rate hikes. Instead, as the table shows, economic growth exceeded expectations largely because of strong consumer spending. In addition, inflation and unemployment were lower than forecast and the 10-year Treasury rate was higher.

While many organizations, teams, and individuals try to predict the direction of markets and economies, it’s not an easy thing to do. 

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