Defensive Stocks Power Record-Breaking Rally As Seasonal Tailwinds Build

Performance column. Outperforming: rising faster than the S&P 500 over recent weeks. Underperforming: lagging the S&P 500 over recent weeks. Neutral: moving roughly in line with the index. Based on 14 weeks of relative price movement. An observation about relative performance, not a recommendation to buy or sell any security. ▲▼ marks a change from last week.

Treasury yields finished the week slightly lower after reaching new multi-decade highs in the front half of the week. The 10-Yr yield hit 5.31% on Monday and the 30-Yr yield 5.67% on Wednesday, both the highest since 2002, before both widely-followed yields eased to 5.24% and 5.60%, respectively, by Friday’s close. The minutes of the Fed’s September meeting, released Wednesday, showed most officials expected one more rate increase by year-end, and the futures market agrees: the market-based odds of a hike at the October 28 meeting held near 18% (our estimate, calculated from futures contracts tied to the Fed’s policy rate), while the rate priced for December, 4.07%, sits about one quarter-point hike above today’s 3.88%. In plain terms, investors expect one more rate increase this year, most likely in December rather than October.

What it means for you. The average 30-year mortgage rate rose to 7.40%, the highest since November 2023, when mortgage rates peaked at 7.79%; before that stretch, rates had not been this high since 2000. Last week’s pullback in Treasury yields has not yet trickled through to borrowers. For savers, shorter-term Treasuries, CDs and money-market funds continue to offer yields of 4% or more with little price risk, and longer-term Treasuries now yield 5.2% to 5.7%. Yields pulling back from their highs is a welcome first sign, but as we often remind ourselves, one week is not a trend, and we would need to see more evidence peak yields are “in” before viewing current yields as a long-term opportunity vs. market “noise.”

Last week’s economic data was mixed. Services businesses grew for a 27th straight month, according to the ISM, and weekly jobless claims held below 200,000 for a fourth week. Consumer sentiment, however, fell to its lowest level since May, with households expecting 4.7% inflation over the coming year, up from 4.6%. The bond market is closed Monday for Columbus Day (stocks trade normally); the week’s key reports and events follow.

Times are Eastern. Consensus estimates are not shown; we report outcomes, not forecasts.

Investor mood. Investor sentiment improved considerably last week. CNN’s Fear & Greed Index, a widely followed gauge of market-based investor sentiment, jumped 14 points from a “fear zone” reading of 31 to a “neutral” 45. Meanwhile, the AAII’s weekly investor sentiment survey of retail traders showed bulls edged out the bears, 40% to 39%, with 21% of respondents holding a neutral view of the stock market. The SKEW Index, which tracks demand for protection against a large decline, or “Black Swan” event, spiked to 154 from 145 even as the VIX, the more widely followed read of near-term implied volatility, held below 15. In our read, that suggests money flows into defensive sectors had conviction behind them, with sophisticated investors hedging new positions while a general sense of complacency remains intact for now.

The S&P 500 ended last week at a record weekly close, and the gains were broad, with 9 of 11 sectors higher. With the midterm elections three weeks away, the history of market performance during election years is worth knowing. Since 1950, the S&P 500 has been higher twelve months after every midterm Election Day, 19 of 19 times, averaging a 15.1% price gain against roughly 9.4% for a typical twelve-month stretch. The likely reason: uncertainty builds ahead of an election, but tends to clear as soon as the results are finalized, regardless of any changes in party control. History offers a guide, not a guarantee, a point underscored by the wide variance in magnitude of post-midterm election rallies, ranging from ~1% to ~33%. As a reminder, a pullback of 5% or more occurred during 6-of-19 post-election advances since 1950, so the path has not necessarily been straight up. This week, market focus shifts to critical inflation data ahead of the October Fed meeting and the start of third-quarter earnings season with major banks set to kick things off Tuesday. As always, feel free to reach out to our team with any questions about how the latest market developments may impact your portfolio in the near term, or if you have any shifts in your long-term investment goals.