Market Update October 10, 2022

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Economic data for the week included the ISM manufacturing index falling further than expected, while ISM services were little changed and remained expansionary. A variety of labor statistics came in generally positive, at least enough so for markets to believe the Federal Reserve will remain hawkish in upcoming policy meetings.

Global stock markets gained ground last week, as economic data started slower than expected, raising the odds of a ‘hard landing’ and, therefore, more tempered central bank interest rate hikes. Bonds were mixed, with credit faring positively, while governments pulled back. Commodities gained sharply as last week’s OPEC+ meeting resulted in oil production cuts—boosting spot prices.

U.S. stocks started Monday experienced their best day in months (up 3%) as weaker ISM manufacturing data helped raise recession odds, as well as the chances of the Fed pulling back on hawkish rate hikes. This was a nod back to the ‘bad news is good news’ theme the market occasionally reverts to, especially when Fed policy is involved. However, by Friday, a decent Sept. monthly jobs report was good news for the already-strong labor market, but bad news for those hoping the Fed might be holding back on future rate hikes, pulling equity sentiment down.

By sector, energy led the way, rising 14% on the heels of a spike in crude oil prices. Other strong sectors included industrials and materials, with gains over 2% for the week. Defensive sectors lagged, with a -3% drop in utilities, in keeping with higher interest rates. Real estate also fell back by over -4%, due to the same interest rate impact. Earnings season for Q3 is poised to begin this coming week, with estimates from FactSet still showing growth, yet to a lesser degree than a few months ago.

Foreign stocks gained last week, generally in line with domestic stocks, with emerging markets outperforming developed markets slightly. The emerging market response was due to a 10%+ in Brazil, based on first round election results ending tighter than many anticipated—this is expected to cause both sides to embrace less extreme and more orthodox ‘middle’ policies favored by markets. Chinese stocks were quiet, as market closed for a holiday week, although new lockdowns in several cities again raised pandemic concerns.

U.S. bonds fell back as interest rates again crept higher, due to economic data during the week not likely poor enough to derail central bank rate hikes. Floating rate bank loans and high yield fared best, with gains of several percent, helped by stronger equities and rising yields, while treasuries fell back. Developed market foreign bonds also declined, not helped by a stronger dollar, while risk-taking was a catalyst for gains in emerging market bonds.

Commodities gained ground last week, led by a significant recovery in energy, and metals rising by several percent. The price of crude oil rose over 16% to just under $93/barrel. The key catalyst was the OPEC+ meeting held last week, resulting in a cut of 2 mil. barrels/day, which exceeded market expectations of 500k-1 mil. barrels. However, the net cut may be less considering lower production levels currently in several nations. The OPEC+ action highlights continued unpredictability, fueled by poor U.S.-Saudi relations following the death of journalist Khashoggi, and leading to U.S. requests for price relief falling on deaf ears. Russia fares well with production cuts, with higher prices scaling up additional revenue. As a result, the U.S. may conduct an end around via loosening sanctions against Venezuela or other measures to raise global petroleum production.

Period ending 10/7/20221 Week (%)YTD (%)DJIA2.03-18.08S&P 5001.56-22.68NASDAQ0.75-31.49Russell 20002.27-23.40MSCI-EAFE1.94-25.68MSCI-EM2.52-25.32Bloomberg U.S. Aggregate-0.25-14.83

U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.909/30/20223.334.224.063.833.7910/7/20223.454.304.143.893.86

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.