Market Update October 24, 2022
Photo by Roel Varor on Unsplash
Economic data for the week included a rise in industrial production, mixed regional manufacturing indexes, and a variety of weaker housing sales and sentiment reports. The index of leading economic indicators continues to lean towards a recession in coming months.
U.S. equity markets saw sharp gains last week, due to stronger earnings and rising hopes for a Fed potentially slowing down on rate hikes, with foreign stocks also positive. Bonds fell back due to still-rising long-term yields. Commodities were mixed.
U.S. stocks saw gains last week with corporate earnings reports coming in better than expected. Additionally, a large batch of options expiring by the end of the week added to volatility. While comments from Fed members earlier in the week pointed to ongoing hawkishness, these were talked back later in the week with possible indications the Fed may slow or pause hikes pause early in 2023 to assess their impact thus far. Of course, such Fed comments aren’t made in a vacuum, and tend to be carefully worded when they are shared. Financial markets took this as a positive sign for better clarity on long-term yields. Every sector ended the week in the positive, led by energy stocks up 8%, followed by materials and technology. Real estate rose nearly 3% despite higher interest rates.
Earnings season for Q3 has begun, with several large firms in the financial sector having already reported. So far, rising loss provisions (a discretionary earnings item to a large degree) in expectation for recession have resulted in lowered earnings in that sector. Per FactSet, 20% of S&P members have now reported, with another half of the index reporting this coming week. Expectations have become more variable, with 115% earnings growth in energy barbelled by double-digit declines in financials, materials, and communications. As a whole, S&P 500 estimates for Q3 have fallen by a percent, but remain a positive 1.5% on a year-over-year basis, although nearly three-quarters of firms have surprised positively on an earnings and revenue basis. For the full 2022 calendar year, earnings growth is expected to be 6-7%, and rising to 7-8% for 2023. The current 12-month forward P/E is 15.6, just below the 10-year average, and right around the long-term average number.
Foreign stocks performed largely in line with U.S. equities, led by Europe along with a stronger euro and pound, while Japan lagged. The sudden, if not totally unexpected, resignation of U.K. PM Truss after only 45 days in office seemed to help sentiment slightly as chances for further inflationary fiscal stimulus have waned. While some recent fiscal measures were largely reversed, including a corporate tax cut, a planned energy price cap for six months remains in place. Such a cap may artificially dampen inflation in the near-term, but later effects on pricing remain unclear. The energy crisis in Europe remains an event on the level of multi-decade extremes, most akin to the experience of the early- to mid-1970s, which ended up being a difficult time for foreign currencies and stock investments—hence today’s depressed sentiment. In emerging markets, the Chinese Communist Party congress has been progressing along with no major announcements, with policy largely in line with expectations, but financial markets hoping for some evolution away from their unpredictable zero-Covid policy. However, China did delay the release of some Q3 economic data, which raised suspicions about its potentially disappointing level of growth (which came in over the weekend at 3.9%, beating the expected 3.4%, but well below the 5.5% government target).
U.S. bonds fell back by nearly a percent last week as interest rates continued their path higher, in keeping with markets’ ongoing assessment of where the terminal fed funds rate will land in this cycle. The 10-year treasury yield ticked up to 4.2%—a level last seen in 2007. Investment-grade corporates fared slightly better, due to spreads tightening, while high yield and floating rate bank loans saw gains. A weaker dollar helped push developed market foreign bonds into the positive, while emerging market debt was little changed on the week.
Commodities fell slightly on net, with losses of 1-2% percent in energy, agriculture, and metals. The price of crude oil fell slightly to $85/barrel; however, natural gas prices fell by nearly -25% due to milder U.S. weather expected. President Biden extended releases from the U.S. Strategic Petroleum Reserve from an original Oct. ending point now into Dec. This is designed to buffer short-term price volatility based on lower announced OPEC+ production, but has also pulled domestic oil reserves down to their lowest level since the early 1980’s.
Period ending 10/21/20221 Week (%)YTD (%)DJIA4.93-13.04S&P 5004.75-20.25NASDAQ5.22-30.16Russell 20003.57-21.58MSCI-EAFE0.55-26.28MSCI-EM0.21-28.03Bloomberg U.S. Aggregate-1.07-16.74
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.9010/14/20223.814.484.254.003.9910/21/20224.094.494.344.214.33
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.