Market Update: November 2023

Welcome to the Monthly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this month.

 

Welcome back! This video series was previously the Weekly Market Update. With all the craziness in my schedule, and because it’s entirely unnecessary to provide weekly updates on the markets anyways, I am electing to change the Weekly Market Update to the Monthly Market Update. With that, I will spend more time on these updates, diving deeper into what the markets are doing and the implications on investments. I will also be speaking more on the cuff and less from a script – so please pardon the occasional stutter and “umm.”

So here’s where we stand in the S&P 500.

1. The market peaked back in January 2022, fell 25.3% over the next 10 months.
2. The S&P then retraced those losses to the tune of 28.2%.
3. That rally ended at the end of July and the market then pulled back about 10% followed by a strong rally last week of 6.5%.

The primary cause of concern over the last two years, really, has been the 10-year treasury yield shown in purple here.

1. Once the 10 year crossed a key upper limit, the market suddenly became very correlated (inversely)
2. The rally in 2023 coincides with the 10-year consolidating.
3. Perfect alligator mouth here with strong inverse correlation.
4. Last week is more of the same

The reason why this matters is very simple. As treasury yields rise, so too do borrowing costs for corporations.

1. Spreads over treasuries. Bonds from corporations must trade with higher yields than ultra-safe treasuries.
2. When borrowing costs rise, profits fall; but not immediately.

Throughout most of 2020, interest rates on the 10 year treasury bond fell significantly, primarily because of the Fed.

1. Low 10 year yields mean low borrowing costs
2. This allowed corporations to issue a lot of debt and very low rates, flushing balance sheets with cash.
3. Rates were short lived, now they have to borrow at these yields if needed.

Here’s the problem, that debt eventually matures and has to be paid back.

1. For large, highly profitable corporations, this isn’t a problem.
2. Come 2025 and 2026, a significant amount of debt is coming due especially in the high yield space marked in light blue and leveraged loan space marked in gray.
3. Problem for corporations who have to pay back that debt but are not profitable enough to do so.
4. “Bond maturity wall”

So the next question is, how many firms will this impact? Well it depends on a firm-by-firm basis. But there are a growing number of publicly traded firms that are not profitable at the moment.

1. Nearly 40%.
2. Not to say these firms will all fail, can’t become profitable, and will suddenly become bankrupt. There could just be some pressure here.

This debt maturity wall has implications economy wide. This Goldman Sachs study on the debt maturity wall indicates that for every $1 increase in interest expense, there could be an eleven cent decrease in capital spending and a 21 cent decrease in labor costs.

1. Capital and labor right there, slowing economy.
2. CFO’s will prepare ahead of time.
3. Could have an impact on investment and on employment.
4. Goldman estimates the higher interest expense will reduce monthly payroll growth by 5,000 jobs/month and reduce GDP by .05%.

Thanks for joining for the monthly market update! We have further updates coming out soon, specifically for the podcast. Also, our website is full of economic, financial planning, and market content. For those looking for more information please visit our website at signaturewmg.com. And don’t forget to like and subscribe.

Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved November 9, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). 10 Year Yield benchmark & S&P 500 (Interactive Charts). Retrieved November 9, 2023, from FactSet Database.

3.Goldman Sachs. US Economics Analyst. “The Corporate Debt Maturity Wall: Implications for Capex and Employment.” Published August 6, 2023. Retrieved from https://www.gspublishing.com/content/research/en/reports/2023/08/07/d2ab6cef-d9ea-453f-b4fa-912d22ab09ee.html.

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