In a year of already strong gains for global stocks, October was another record-setting month.
In particular, the S&P 500 reached a record high and finished the month up 7%. October marks the biggest gain for the index since last November when stocks jumped in the wake of the U.S. election and news of vaccines. Consumer discretionary and energy stocks were the highest returning economic sectors.
September brought heightened economic concerns that presented a bleak outlook for U.S. companies and consumers. But investors’ nerves were calmed by strong earnings and positive outlooks from companies reporting third-quarter results in October.
Companies have continued to show resilience and innovation in the face of many headwinds. According to FactSet, 82% of S&P 500 companies that reported third-quarter earnings beat earnings expectations. Most noteworthy is the ability of companies to defend, or increase in some cases, profit margins despite higher input prices. Additionally, higher energy prices have helped the energy sector continue its rebound from the lows of last year.
The U.S. economy grew at a 2% annualized pace in the third quarter, its slowest gain in the post-pandemic era. Most notably, the rise in the COVID delta variant had a large hand in the deceleration, exacerbating supply-side issues and slowing consumer spending.
But delta variant cases are falling. Cases have more than halved in the U.S. since September peaks. Booster shots, vaccines for younger children, and new drug therapies should dampen the impact of future waves as the economy continues to reopen.
Notably, the U.S. Treasury yield curve flattened, meaning the difference between yields of long maturity and short maturity U.S. Treasury bonds narrowed. A flattening yield curve suggests that the market is “baking in” interest rate hikes from the Fed sooner than previously expected. Markets are beginning to price in a rate hike for 2022.
A flatter yield curve is also a sign the market is less concerned about chronic high inflation. Readings from the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, showed that inflation could be partially moderating as prices are rising less quickly month-to-month than prior periods this year. Further, traditional measures of inflation tend to look at year over year numbers and, when looked at from pre-pandemic levels, inflation numbers are above average but more moderate.
It will be a delicate balancing act for the Federal Reserve to normalize its policy after such an unprecedented shock to the economy while attempting to fulfill its dual mandate.
On the fiscal side, President Biden’s social spending bill has slimmed down to $1.7 trillion from its $3.5 trillion original price tag. At this juncture, details are murky, but anticipated funding appears to be from tax increases on certain corporations and ultra-high income individuals. The infrastructure bill appears to have bipartisan support. Industrial and material sector stocks benefitted during the month on the news.
What It All Means
How the central banks normalize monetary policy will drive markets in the near term. Fiscal spending bills are still making their way through Congress. We are monitoring the details of each bill to understand how they may impact our clients.
There have been many comparisons to the 1970s period of low growth and high inflation, known as stagflation. Higher energy prices are similar, but a lot is different. The ultimate duration of the supply chain woes is unknown, but over time, these issues should be resolved. Healthy business activity, consumer spending, and job gains fly in the face of low growth.
As we progress towards the end of 2021, there is much room for optimism, but this is not to say it won’t be a bumpy ride. Research shows attempting to trade around market events can be an unproductive exercise for long-term success. Sticking with your long-term strategy is important now more than ever.
If you have had any changes in your circumstances or would like to discuss your situation, please do not hesitate to reach out.
Contact us at 865-584-1850 or info@proffittgoodson.com