What happened last week
- Last week, the quarter ended with both stocks and bonds mainly in the red.
- Long-end Treasury yields once again surged to fresh cycle highs.
- Technical factors, including quarter-end rebalances and short covering, dominated last week’s price action.
What we’re watching this week
- The last-minute deal to avoid a government shutdown is a positive for markets, but early reactions have not inspired confidence.
- Economic highlights are the September payrolls report and job openings data.
- We are monitoring the move in Treasury yields for signs of a local peak, which could lead to near-term equity strength.
Horizon’s Investment Management Views
- In a choppy week to end a choppy quarter, long-term yields continued their steady march higher as stocks ended mostly lower. While yields have been driving equities and other markets for months, the last week and a half have seen an interesting shift in the bond price action – the front end of the yield curve has remained unchanged around 5% while long-term yields have repriced substantially higher. We sense that this change in price action is more technical than Fed or economy-related; our view is we are likely to be at a near-term peak in bond yields. After an increase of over 70 bps to the benchmark 10-year yield in the third quarter and the well-known negative seasonals in September, such a peak would be a helpful tailwind to equities as we head into the end of the year.
- Last week’s price action felt more flow-driven and technical than fundamentally motivated. After a challenging quarter, short-covering flows likely drove domestic small-cap outperformance; the tech-heavy NASDAQ 100 also outperformed the S&P 500. Sector performance in the US had a pro-cyclical and anti-defensive theme, but much of this felt flow-driven. International stocks lagged as dollar strength continues to weigh on non-US shares. Outside of the regular macro catalysts, we are looking at upcoming earnings for new themes.
- The weekend’s surprise deal to avoid a government shutdown is positive for market sentiment, but the early reaction has been tepid. As has been our stance as of late, we are closely watching price action in the bond market; some of the increases in yields and the rally in the dollar could have been positioning for a failure to strike a deal in DC. Regarding upcoming data, the job market is in focus; the September payrolls report on Friday, and job openings on Tuesday are the week’s highlights.
The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. The Nasdaq-100 is a stock market index made up of 100 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. Small-cap stocks are represented by the S&P 600 Index which covers roughly the small-cap range of American stocks, using a capitalization-weighted index. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.