Following September, the worst-performing month of the year, equity markets bounced back with a vengeance in October, hitting all-time highs in the process. The primary catalyst was better-than-expected corporate earnings, which seemed to confirm a thriving recovery. As of October, more than half of S&P 500 companies have reported earnings: 82% of those beat estimates, exceeding the five-year average of 76%.
Several commodities, such as natural gas, oil, and coal, reached new heights as well. Surprisingly, U.S. bond markets managed to end the month flat despite a volatile month as inflation readings came in hot.
Inflation continued to dominate headlines in October. The U.S. Consumer Price Index jumped 5.4% year-over-year in September, the largest increase since 2008, but at the same time, inflation expectations have remained relatively level. Elsewhere, Eurozone inflation expectations rose above the European Central Bank’s 2% inflation target for the first time in seven years, with future inflation expectations at their highest levels since 2014.
In response to rising prices, central banks around the world have moved to tighten monetary policy. In October, the Bank of England signaled that an early rate hike could happen before year’s end. The Bank of Canada unexpectedly ended its quantitative easing program and signaled early April 2022 rate hikes. Meanwhile, several countries, such as Chile, New Zealand, and Poland, already raised rates this year.
However, the world’s two major central banks—the U.S. Federal Reserve and the European Central Bank—are sticking with previous guidance to hike interest rates no earlier than 2023. Some might argue that they’re behind the curve, but the persistence of current price increases remains to be seen.
Part of the challenge lies in the global supply chain. In October, supply chain bottlenecks persisted and even escalated. Cargo ships remain stuck outside of major ports, trucking routes are at maximum capacity, and companies have faced acute labor shortages. According to the World Bank, an estimated 8.5% of global container shipping is stalled in or around ports, double the rate observed in January 2020.
As we head into the holiday season during which retail sales traditionally peak for the year, a swift reprieve is unlikely. Just-in-time (JIT) inventory management systems and port infrastructure are structural concerns that cannot be retooled easily in such a short period of time. In other words, these price pressures could persist well into next year.
This can help to explain the Fed’s view of temporary inflation and moderate growth expected next year.
Although there are signs that global central banks are reining in monetary policy support to combat rising inflation, we don’t see this as a major concern. The economic recovery looks to be on solid footing, and despite some shifts in policy major central banks are maintaining easy monetary policies.
Heading into year-end, we’re on the lookout for tax and infrastructure reforms in the U.S., which could add further fiscal support to the economic recovery.
This year, the march to all-time highs has been nearly relentless, though supply chain issues may dampen spirits heading into the holidays. However, look out for potential supplementary government support, as Congress heads to a vote on infrastructure and social spending.
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The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Nasdaq Composite is a market-capitalization- weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities. The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related securities, corporate securities, residential and commercial mortgage-backed securities, and asset-backed securities.
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