After a brief pause in September, equity markets surged to fresh highs in October as the S&P500 posted its best performance of the year so far. Equities caught a bid on the back of solid earnings and rising risk appetite as Congress drew closer to a solid spending package. Stocks rose in unison with oil prices, with WTI crude lifting over +10% in the month, fetching near a seven-year high around $86/bbl as consumption dwarfed supply draining oil reserves. The ASX 200 slightly declined for the second month running, dipping by 0.1% in October. The ASX200 lagged last month due to an uptick in inflation and tighter monetary policy in Australia compared to other developed economies.
Earnings season started positively, but economic data began to muddy the waters as consumer prices continued higher. If prices continue to rise further, the Federal Reserve may have to cut back on its support for the economy and start to raise interest rates, even though the US economy grew only 0.5% in Q3, which is the weakest growth figure since the pandemic began. The Federal Reserve has signalled that it does not plan on raising interest rates soon, but the market now expects to taper their bond-buying program in the months ahead.
Bottlenecks in the global supply chain and the combination of rising energy prices have investors on their toes regarding the inflation outlook. The short end of the curve has begun to rise as expectations for interest rate hikes around the globe have been brought forward. Many Central Banks worldwide have become more hawkish in their views which have put upward pressure on yields. The Bank of Canada surprised the market by ending its bond-buying program abruptly and signalled rate hikes in the near future. The Bank of England is preparing to raise rates in November, and the Reserve Bank of Australia abandoned the 'yield curve control policy'.
October 2021 Summary:
- The short end of the curve climbed as markets priced in rate hikes in 2022.
- Iron ore dipped to $108/Mt as fallout from the property sector weighed on the steel output, and production was cut back due to power outage.
- Stocks posted new all-time highs as Congress came closer to a spending deal and earnings season kicked off.
- The yield curve flattened in the US, leaving many asking if the economy could handle sustained higher rates.
- CPI figures continued higher while PPI data came in a touch softer, which means price pressures may ease in the months ahead.
All of the eleven equity market sectors finished higher, led by Energy and Consumer Discretionary stocks, both up over +10% for October. The Russell 1000 Growth index was the standout performer gaining +8.5%, and the Value sector gained +5.2%. Small and micro caps enjoyed gains of +4.3% and +2.3%, all quoted on a total return basis.
Commodity Markets:
The largest gains in the commodity markets in October were seen in the oil markets, with WTI futures closing the month higher by +10.3% and Brent crude close behind with +8.1%. Agriculture markets have seen a modest bid recently, and Corn was the standout this month, gaining close to +6.0%. Natural Gas futures experienced some volatility after spiking higher to start the month, ending down -9.1%, and Gold ticked up slightly, gaining +1.5%. The Bloomberg Commodity Index (BCOM) also printed new highs to start Q4, finishing up +2.7% in October.
Earnings Season:
We've now passed the mid-point of the Q2 earnings season with over 50% of S&P500 companies have reported, and we have seen positive earnings surprise in over 80% of those companies, with an average beat of almost 10% vs market expectations. These numbers are above the five year average of 75% and 8.2%. Equally impressive are the earnings growth numbers, with just under 81% reporting positive growth with an average growth rate of 39%.
Interest Rates:
US2Y Treasury yields spiked higher in October to close 0.56%, which is up significantly from the 0.27% close in September, causing the yield curve to flatten. The US10Y yields climbed but at a slower rate, closing the month at 1.56%, up from 1.48% the month prior. US30Y yields fell at the beginning of Q4, finishing the month at 1.93%, from 2.03% in September. There is currently 1% between the US2Y and US10Y yields, but an inversion of that spread is typically followed by a recession which is one metric to watch.
Cryptocurrencies:
Bitcoin rallied to new highs in October after trending mostly down in September, hitting a high point of around $66,000/coin, as the first Bitcoin ETF was launched. Ethereum also pushed to new highs in October, trading above $4,400 after an upgrade to its network was well-received. Interestingly, the price action in Ethereum since the start of winter shows similarities to Bitcoin's 2017 run higher during the same time period.
The Months Ahead:
Equity markets are at record highs at the time of writing, and with November being a seasonally strong month, we may continue to see markets push higher. November is the best month for equity market returns on a 10Y timeframe. The upcoming holiday shopping season and corporate earnings should give markets a tailwind into the year's end. Still, it is worth watching the impact of the Fed tapering their bond-buying program, supply chain bottlenecks around the world and the rising consumer prices, which could cause markets to temper their risk appetite.