Monthly Archives: October 2022
Stock Prices Rise as Investor Sentiment Improves
Market Data as of Week Ending: 10/28/2022 unless noted otherwise
U.S. stock prices advanced last week as investor sentiment improved for risk assets. Investors have been concerned that companies would report less favorable earnings and analysts would be forced to lower expectations for growth next year. However, third quarter results have been largely in-line with expectations at around 2% growth and 71% of companies in the S&P 500 reporting earnings above estimates. It is worth noting that according to FactSet, if the energy sector is excluded, the S&P 500 would be reporting a 5.1% decline in earnings. Small and mid-sized companies generally outperformed their large cap peers, while the growth factor was a headwind. Ten of the eleven sectors recorded gains with the communication services sector as the only outlier due to large drawdowns from Alphabet (parent of Google), and especially Meta Platforms (parent of Facebook). Developed foreign and emerging markets stock prices ended the week mixed with results as emerging markets finished the week in negative territory.
U.S. Treasury yields declined as foreign central banks attempt to join the Federal Reserve in a more aggressive approach to reduce inflation. The 10-year U.S. Treasury declined and ended the week at 4.11%, while the 2-year yield was unchanged and remained at 4.55%. Long duration outperformed last week as all segments across the bond market recorded gains. High yield corporate bonds generally outperformed with the only exception among long duration, where investment grade took the top spot. Yields declined for both investment grade corporate and high yield bonds, finishing the week at nearly 5.9% and 9.0%, respectively.
Economic growth, as measured by gross domestic product (GDP), came in better than expected at 2.6% after adjusting for inflation. This was the first positive result for the year, bolstered by exports of oil and natural gas as supplies have been disrupted in Europe. Inflation has been persistently high, but wages have also increased and were reported at 5% higher, according to the employment cost index. Consumer spending has increased due in part to higher prices, but even after adjusting for inflation, spending increased 0.3% in September compared to one year ago. Housing continues to be a problem for economic growth as a flurry of negative reports came through this week. Inside the third quarter GDP report, residential investment fell at a 26% annual rate during the third quarter. Pending home sales declined more than 10% in September, the largest drawdown since the pandemic and prices declined for the second consecutive month in August, according to the S&P Case-Shiller Index. The European Central Bank (ECB) increased rates by 0.75% for the second consecutive meeting and noted that further increases may be necessary to reduce inflation.
Stocks Regain Footing as Investors Look to Earnings and Fed
Market Data as of Week Ending: 10/21/2022 unless noted otherwise
U.S. stock prices regained traction as investors reacted positively to some prominent earnings reports and signs that the Federal Reserve might slow its pace of interest rate hikes. The S&P 500 ended the week 4.75% higher. Reversing its trend, large-cap companies generally outperformed their mid and small-sized peers, while the value factor was a headwind. All eleven sectors recorded gains with the energy sector leading the way on the announcement of a release from the U.S. Strategic Petroleum Reserve. Traditionally defensive sectors in health care, utilities and consumer staples lagged. Developed foreign and emerging stock prices ended the week slightly higher, but underperformed the U.S.
U.S. Treasury yields continued their rise as mixed reports kept volatility in the market. The 10-year U.S. Treasury ended the week at 4.29%, while the 2-year yield increased by 0.05% to 4.55% as several Fed officials made comments suggesting a higher-than-expected fed funds target rate. Short duration outperformed last week as longer duration bonds were negative across the board with government bonds faring the worst. High yield corporate bonds were the best performing asset class as its yield declined from 9.7% to 9.6%, while yields on investment grade corporate bonds rose to 6.1%.
It was a light week for economic data releases as it was kicked off on Monday with a negative New York Fed’s Empire State business index reading. The index fell 7.6 points to -9.1 in what was the third straight negative reading – any reading below zero indicates deteriorating conditions. The U.S. industrial production index rose 0.4% in September, helped by the increase in oil and gas drilling and uptick in auto production. The NAHB confidence index fell to 38 in October, falling for a record tenth month in a row as home builders say the situation is unhealthy and unsustainable. The Philadelphia Fed’s manufacturing index edged up slightly to -8.7 in October from -9.9 but was below analyst estimates. The U.S. leading economic index fell 0.4% in September, marking the seventh decline in nine months and suggesting an increasing likelihood of a recession before year-end. The new U.K. Prime Minister, Liz Truss, resigned last week after roughly six weeks in office.
Stocks End the Week Lower as Inflation Leaves Investors Mixed
Market Data as of Week Ending: 10/14/2022 unless noted otherwise
U.S. stock prices continued their volatile trading as the S&P 500 reached its lowest level since November 2020 before rallying to end the week down -1.53%. Third-quarter earnings season began in earnest as a handful of companies kicked it off with mixed results. Analysts are forecasting that third-quarter earnings for S&P 500 companies will rise by an average of 2.4%, which would mark its lowest earnings growth rate in two years. Small-cap companies continued their outperformance versus their large and mid-sized peers. Value stocks provided downside protection, outperforming their growth counterparts. Traditionally defensive sectors in consumer staples and health care along with financials benefitted from positive earnings reports and were able to manage gains for the week. Consumer discretionary, information technology and utilities were the hardest hit sectors. Developed foreign markets outperformed the U.S., while emerging markets declined sharply and underperformed.
U.S. Treasury yields continued their rise as new inflationary data caused investors to evaluate their monetary policy expectations. The 10-year U.S. Treasury rose 0.19% to 4.02%, eclipsing 4.00% for the first time since 2008. The 2-year yield increased by 0.22% to 4.50%, its highest level since August 2007. Government bonds were the best performing asset class, while long duration bonds felt the brunt of the sharp move in yields. Yields on investment grade corporate bonds rose while high yield bonds remained flat, finishing the week at nearly 6.0% and 9.7%, respectively.
It was a mixed week for economic data as investors were focused on inflation prints near the middle of the week. The NFIB small-business index increased slightly to 92.1 in September, its third consecutive month of gains as better prospects for sales boosted confidence. U.S. producer prices rose 0.4% in September, marking its first increase in three months. Consumer prices rose 0.4% in September, as the cost of staples such as food, rent, medical care and new cars all rose last month. The core inflation rate, which strips out food and energy prices, rose 0.6% in September. U.S. retail sales fell flat in September as consumers slowed their spending in the face of inflation and rising interest rates. Consumer sentiment rose slightly to 59.8 in The University of Michigan’s early October reading. Consumer expectations for inflation over the next year rose to 5.1% from September’s low of 4.7%. The U.K. economy unexpectantly shrank -0.3% in August due to a fall in industrial output.
Markets Start the Fourth Quarter on a Positive, but Volatile Foot
Market Data as of Week Ending: 10/07/2022 unless noted otherwise
U.S. stock prices started off the new month and quarter on a positive, but volatile, foot. The markets experienced a broad rally early in the week off renewed hopes of a sooner-than-expected Fed softening, before attempting to give it all back on the heels of the September employment report. Continuing its trend, mid and small-cap companies generally outperformed their large-sized peers, while the valuation factor had mixed results depending on size. The energy sector outpaced the other ten sectors by a wide margin as oil prices surged off the news of OPEC+ agreeing to cut production by 2 million barrels per day. Real estate, utilities and the consumer centric sectors underperformed, posting negative returns for the week. Developed foreign and emerging stock prices moved higher, outperforming the U.S.
U.S. Treasury yields rose yet again in what was another volatile week in the bond market. The 10-year U.S. Treasury ended the week at 3.88%, while the 2-year yield increased by 0.03% to 4.31% as slowing U.S. manufacturing data renewed growth concerns. Longer duration bonds experienced a mixed week depending on quality. High yield corporate bonds were the best performing asset class, recording a gain across all durations as its yield declined from 9.7% to 9.3%. Yields on investment grade corporate bonds remained flat, finishing the week at 5.7%.
It was a mixed week for economic data releases as Friday’s employment report remained at the forefront of many investors’ minds. The ISM manufacturing index fell to 50.9% in September, its lowest level since the spring of 2020 as new orders have declined and manufacturers aren’t hiring as many workers. U.S. job openings fell sharply in August to a 13-month low of 10.1 million, marking the fourth decline in five months, signaling the red-hot labor market may be beginning to cool. U.S. factory orders were flat in August, which was in line with expectations. The ISM services index slid to 56.7% in September, in line with estimates, as continued hiring offset slowing sales. The U.S. added 236,000 jobs in September, the smallest month-over-month increase since April 2021, but still strong historically and potentially stronger than the Fed would like. The unemployment rate dropped to 3.5% from 3.7%, marking one of the lowest rates since the late 1960s. The new U.K. government announced plans to implement tax cuts and spending increases funded by increased borrowing.
Markets Close Out September Lower as Inflation Weighs
Market Data as of Week Ending: 09/30/2022 unless noted otherwise
U.S. stock prices continued their slide lower as investors grappled with turmoil in UK financial markets and inflation data that paved the way for the Fed to continue their hawkish monetary policy. As growing concerns that the volatility and swings in interest rates will lead to a “financial accident”, the Bank of England (BOE) intervened on Wednesday to buy UK government bonds to stabilize market conditions. Small companies generally outperformed their mid and large-sized peers, while the valuation factor had mixed results, depending on size. Ten of the eleven major sectors in the S&P 500 dropped with declines being broad based across sector type. Energy was the only sector to record a gain as oil prices rose for the first time in five weeks as OPEC+ is said to be considering output cuts ahead of their meeting. Developed foreign and emerging stock prices declined with mixed results relative to the U.S. as currency markets saw further volatility.
U.S. Treasury yields experienced volatile trading last week before advancing again. The 10-year U.S. Treasury ended the week at 3.83%, after reaching a 14-year high midweek before declining 0.25% after the BOE’s announcement, while the 2-year yield increased by 0.07% to 4.28%. Longer duration bonds experienced the steepest declines for yet another week while higher quality bonds mostly outperformed. High yield corporate bonds continue to see negative flows, as the asset class saw higher-than-average volume during the week. Yields on investment grade and high yield corporate bonds rose, finishing the week at 5.7% and 9.7%, respectively.
It was a mixed week for economic data releases as the bulk of the releases came at the end of the week as investors awaited new inflation data. Durable goods orders at U.S. factories fell 0.2% in August as they saw lower demand for large airplanes but business spending showed surprising strength, rising 1.3%. U.S. pending-home sales fell 2% in August, marking the third straight month of declines as rising mortgage rates have deterred potential buyers. U.S. PCE rose 0.3% in August as the sharp decline in gas prices helped offset rising costs while core PCE, which omits food and energy costs, rose by a higher than anticipated 0.6%. Consumer spending rose by 0.4% in August, but only a mere 0.1% after inflation, as consumers have tampered their spending as cost-of-living increases. The University of Michigan consumer sentiment index rose to 58.2 in August as falling gas prices, rising wages and the strong labor market has provided a slight boost to their outlook.