Five In Five

November 2024

Five in Five is a monthly publication where we share graphs around five topics that illustrate the current state of the markets, with brief commentary that can be absorbed in five minutes or less.

This month's topics include:

1. Federal Funds Rate
2. Corporate Bond Spreads
3. Services Activity at Two-year High
4. Volatility in Line with 10-year Average
5. Mid-caps Outperform During October

1. Federal Funds Rate

Source: BTC Capital Management, Bloomberg

• The Federal Reserve (Fed) lowered the Federal Funds rate 25 basis points to 4.75%.
• The Fed still considers itself to be restrictive.
• The Fed signaled addition cuts will come, but the pace will be dependent on data.
• The market is now pricing in a cumulative 150 basis points in cuts to achieve a terminal rate of 4.0%.
• The terminal rate was closer to 3.0% when the Fed began cutting interest rates but is 100 basis points higher.

2. Corporate Bond Spreads

Source: BTC Capital Management, Bloomberg

• From banking crisis to tightest spreads in history in 20 months.
• The 20-year average spread is 149 basis points.
• The corporate index would underperform Treasuries by 6.5% for every 100 basis points in spread increase.
• Spreads could remain tight in a rising rate environment as pension and insurance companies target yield.
• However, spreads would significantly underperform during earnings recession scenarios.

3. Services Activity at Two-year High

Source: BTC Capital Management, FactSet

• The services segment of the economy, which represents approximately two-thirds of the overall economy, has been in expansion mode for most of the period following COVID.
• The graph above displays activity in the services segment of the economy as measured by the ISM Services Purchasing Managers’ Index (PMI). Any measure above 50 signals expansion, while any measure below 50 signals contraction. October’s release was 56.0, a two-year high.
• The ISM Services PMI remains in expansion mode as consumers continue to allocate their discretionary spending towards services, despite continued relatively higher prices.

4. Volatility in Line with 10-year Average
 

Source: BTC Capital Management, FactSet

• Stock market volatility is currently in line with the historic 10-year average (dotted white line) as measured by the CBOE Volatility Index (VIX).
• Since mid 2023, stock market volatility was actually below the historic average until very recently.
• The VIX generally falls within one standard deviation (the blue lines) of the average, with certain periods as outliers (i.e. COVID).
• Large cap equities have seen significant gains since 2023 despite this era of relatively low volatility.

5. Mid-caps Outperform During October

Source: PSC Portfolio Strategy

• For the month of October, Mid-cap stocks outperformed all other style/size categories.
• Small cap Growth stocks were the worst performing style/size category during October as all categories fell during the month.
• Earnings forecasts for Small cap stocks are being revised downward to a larger degree than Large cap stocks causing investors to be concerned about the sustainability of earnings growth.

Investment products and services may lose value, are not a deposit, are not guaranteed by any financial institution, and are not FDIC insured or insured by any government agency.

Source: BTC Capital Management, Bloomberg, FactSet, PSC Portfolio StrategyThe information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized. This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.