Middle-East Tensions Sour Market Sentiment

U.S. stocks closed lower after a positive start, which then faded through the afternoon session.

Tech stocks held up after strong results from Amazon and Intel. Intel closed up 9%.

Traders were mostly guided by stronger-than-expected inflation data and the geopolitical tensions in the Middle East.

PCE data, which is closely watched by the Fed, showed consumers expect prices to rise by 4.2% over the next year, up from 3.2% last month. They also see costs rising by 3% over the next 5 to 10 years. On the flip side, consumer spending rose, closing the quarter that has been the highest in two years. Analysts seem to think this cannot be sustained with higher inflation.

Over 80% of consumers said inflation would cause greater hardship than unemployment in the year ahead, the highest share in almost a year, according to the survey. Nearly half blamed high prices for eroding their living standards, the most in 15 months.

The most prominent news was probably the possibility of a ground assault by Israel, which led the sentiment index down 4 points to 63.8. Oil and gold rose, with the latter closing above $2000.
Bond yields fell across the board, with the 2-year outperforming. The 10-year ending just 1 basis point lower on the day.

For the week, the DOW fell 2.14%, the S&P lost 2.53%, and the Nasdaq slipped 2.62%.

Here are the closing levels for Friday, October 27th, 2023:

Last Change %Change
DOW JONES   32,417 -366.71 -1.12%
S&P 500 4,117.37 -19.86 -0.48%
NASDAQ 12,643.01  +47.40 +0.38%
U.S. 10Yr 4.835% 
VIX 21.27 +0.59 +2.85%

You can probably make some assumptions about how the moves on Friday reflect investors’ sentiment. The PCE data initially did not cause a selloff, as one might expect. The selling probably came from fears of the tensions in the Middle East. Israel has been gearing up for a full-scale invasion, and Iran is getting more vocal.

From a technical point of view, more than two-thirds of stocks for companies in the S&P 500 index are trading below their 200-day moving averages, according to an analysis by Bloomberg Intelligence. That’s a sign of widespread pain for stock prices after many companies have posted lackluster earnings amid high interest rates and bond yields that keep creeping up.

Going into the third month of declines, it does not look good from a sentimental and technical point of view.

Some will argue that the market is oversold, and they are probably right. However, we would need a strong catalyst to change the sentiment so that the bulls can be confident in turning things around. For now, it is probably going to be a case of selling the rallies, with more pain around the corner.
Source: CBOE, Bloomberg

This commentary was written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.

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