October was an eventful month for major asset classes like stock, real estate and fixed income. As the last quarter of the year progresses, war in the middle east, heightened geopolitical tensions between US and China, and another potential spike in oil prices dominating the headlines certainly isn’t good for global markets. Even though there’s no direct relation to OPEC+ and oil supplies here, there is likely the perception that this will curtail supply, adding to an already tricky situation in the fight against global inflation.
The stock market experienced a downward trend in the month of October. The broad-market index – S&P 500, The industrial Dow, and the tech-heavy NASDAQ Composite were down 3%, 1.36%, and 3.75% respectively. The stock market continued to decline in October predominantly due to higher bond yields, lower earnings (and projections) and higher-for-long interest rates.
In the bonds market, Fitch’s downgrade of US Sovereign debt had initially kickstarted a rise in US Treasury yield earlier in Q3 2023 —combined with anecdotal inflation indicators and higher-for-longer interest rates, the yield on the 10-year Treasury bond shot above 5% —hitting its highest since 2007 and rattling investors, before retreating a bit.
In the housing market, rates hit a-23 year high with the 30Y Mortgage rate hitting 7.7%. Higher interest rates have rubbed off on mortgage rates, causing the market to experience its lowest housing applications since 1995.
Asset Classes Overview
The S&P 500 and Nasdaq Composite wrapped up their worst October since 2018. The S&P 500 fell 3% this month, marking its third-straight month of declines.
Our Rise Equity portfolio also closed the month negative (-2.71%), mirroring the momentum in the broader stock market (−2.62%). Amidst the sell-offs in the market, our market hedges and shorting positions are helping to reduce the impact of the overall market downturn on our stock portfolio.
We are about halfway through the earnings season, with major Q3 corporate profits higher than expected and beating estimates (77.5% beat, compared to the historical two-thirds). During this reporting period, we closely watched tech giants, financial institutions, semiconductor and energy companies. This performance by major corporations fits well with solid U.S. consumer spending and nominal gross domestic product (GDP) growth during the period. Still, equity investors have become more risk averse as they assess the outlook for resilience, growth and inflation.
The health of the US economy continues to be a focal point of concern. Reports on employment figures, inflation rates, and manufacturing data have influenced market sentiment. Investors have closely monitored these economic indicators for insights into the potential trajectory of interest rates and overall economic stability. The Federal Reserve’s monetary policy decision on interest rate remains a critical factor affecting market direction.
Regardless of the bearish market sentiment, we remain optimistic about our investment strategy and the business fundamentals of our portfolio companies. We are confident in our position in the market, and we encourage you to approach your investments with a long-term perspective: “buy low and sell high”.
Our Rise Real Estate portfolio returned 1.26% in rental income for October, up by 0.09% from 1.17% in September. The ripple effects of high interest rates translate into higher mortgage rates, higher home prices, and higher rental income, which our real estate assets benefit from.
Mortgage rates are currently at the highest level in 23 years, while applications for home buying have plummeted to lows not seen since 1995. Interest rates on a 30-year mortgage are close to 8% up from 3.9% pre-pandemic, with the average new house payment at a record $1,900/month – the highest point in almost a quarter century, creating an enormous premium for home buying vs renting, with home buying over 50% more expensive.
Having analysed the renewed housing data in the wake of the spike in mortgage rates over the past two months, we discovered that while new home sales rose strongly in September, existing home sales fell for a seventh consecutive month in October to their lowest level in more than a decade, making this period the least affordable housing period of all time in the US.
With this, we expect our real estate portfolio to continue to provide better returns to our investors due to high mortgage rates and low house inventory in the US. In a period of sell-offs in stocks and bonds, real estate provides another lucrative investment opportunity for investors. Our real estate asset class provides investors with stable and consistent cash flow and is a haven in these uncertain times.
At Rise, our fixed-income investments generated a return of 0.83% for October 2023. This performance underscores the resilience and stability of our fixed-income strategy.
In the fixed income market, the sell-off in global markets has gathered pace, and yields on 30-year Treasury bonds hit 5%, the highest level since 2007, as traders brace for an extended period of elevated interest rates. The benchmark bond (10-year Treasury) yields climbed above 4.5%, the highest levels since 2007, as investors weighed a more hawkish Fed, large US fiscal deficits, and persistent inflation.
Treasury yields have risen steadily for almost two years, as investors kept anticipating that Jerome Powell would raise interest rates to combat persistent inflation. Bond yields are used as the benchmark against which lots of other interest rates are set, so recent sky-high yields have contributed to the current eye-popping mortgage rates, which have made homeownership 52% more expensive than renting.
US employment news also did not bode well for those focused on when the US Fed will start lowering interest rates. The labour market data showed job openings unexpectedly jumped in September. Investors are worried that if rates stay higher for longer and we slow down the economy far enough to battle inflation, the US economy will slide into a full-blown recession. Fixed-income traders and investors are bracing for further bond sell-offs amid surging oil prices and a massive fiscal deficit, alongside the US economy’s continued resilience.
Through diversification and a keen eye for opportunities, we expect our fixed portfolio to continue to provide better and steady returns to our investors. At Rise, we are committed to helping you achieve your financial goals through thorough analysis and careful selection of investment opportunities. So remember to stay invested.