Market Update October 31, 2022

Photo by Ashley Levinson on Unsplash

Economic data for the week included Q3 GDP showing positive growth, slightly better than expected. Durable goods orders also experienced a positive month, as did personal income and spending for September. On the other hand, new home sales and various housing price metrics continued to see weakening trends.

Global equity markets gained ground in developed countries last week, while emerging market indexes fell back, led by China. Bonds also fared positively last week, as longer-term interest rates eased from recent highs. Commodity prices were mixed.

U.S. stocks were mixed on the week, with results largely driven by company earnings—last week being a high-volume week for those reports. Thursday’s positive GDP report turned early stock gains into losses as investors expected the strength to further show the Fed that the economy can ‘handle’ rate hikes at a rapid pace, although hopes were still high otherwise that the Fed may pause sooner than later given the slowing in other data. The Elon Musk takeover of Twitter seemed to dominate financial news, but had minimal impact on broader markets.

Every sector but communications rose last week, led by financials, industrials, and defensive utilities—an unusual mix of cyclicals and defensives. Earnings reports for Q3 continued, with a third of S&P firms missing estimates thus far—technology and tech-related stocks hit especially hard. This included disappointing earnings results from Alphabet/Google and Microsoft, but Meta/Facebook even more so, with the stock price falling -25%. Amazon also fell back by nearly -15%, with a disappointing revenue and earnings outlook. In the case of Meta specifically, concern about revenue sensitivity has risen, with such a dependence on clicks, coupled with a rise in ‘anti-tracking’ sentiment from consumers, relative to Apple, for example, which manufactures physical products. Such distinctions become more important when the economy is slowing and the margin for error tightens. Revised forward-looking adjustments for revenue and profit margin, translating to earnings, can result in sharp reactions when earnings are announced at times like these.

According to FactSet, which analyzes transcriptions of executive language, two of three calls mentioned inflation (in fact we’re a bit surprised it wasn’t higher, due the high-profile nature of the issue, even if not every firm is affected to the same degree). In most S&P groups, the irony is that higher inflation has boosted nominal earnings higher, keeping growth in the positive in many cases, while real earnings growth has become more challenged.

Foreign stocks in developed market fared positively last week, while emerging markets were held back by sharp losses in China and Brazil. The ECB raised interest rates by 0.75% to 1.50%, as expected. However, comments were along the lines of a pause in the rate hike pace, as current levels are closing in the ‘neutral’ target level. That could mean a 0.50% hike in December, along with a likely roadmap for the unwinding for their bond portfolio in Q1-2023. Europe differs from the U.S. in that the economy is slowing at a faster rate, with a weak outlook due to uncertainty over the winter energy situation. Surprising markets, Canada decided to only hike by 0.50% as opposed to the expected 0.75%, raising hopes that the U.S. and other developed nations will follow that example.

The Chinese Communist Party conferenced ended with concerns over the upcoming few years, resulting in Hong Kong and Chinese shares down sharply. The composition of the new leadership group, while it didn’t contain any surprises, caused markets to assume a higher likelihood of more extreme policies. These include more future lockdowns and regulatory crackdowns, as well as lessened experience and interaction with the West. There have also been protests in China in response to a third 5-year term for Xi Jinping, which showed some signs of public discontent. In other news troubling to global markets, rising Covid cases have resulted in additional lockdowns (again).

The strength of the U.S. dollar has remained a headwind for foreign markets, as it raises the prices of imported goods, as well as affects funding markets, particularly in EM. However, while EM has been held back by the dollar’s strength, the rise in local currency debt markets in the last decade or two has buffered the impact compared to troubles in past decades, for example. Interestingly, year-to-date, the U.K. has been the best-performing primary global equity market, even in U.S.-dollar terms (a headwind), which may surprise some people.

U.S. bonds gained ground last week, as interest rates pulled back in keeping with weaker economic prospects. As in recent weeks, slowing economic data raised hopes the Fed may pause sooner than later; in fact, some Fed officials alluded to a potential pause in comments, as did the ECB. Bond prices were up across the board, led by corporates with tighter credit spreads (especially high yield). Foreign bonds also fared positively, with help from the U.S. dollar falling back by over a percent.

Commodities were mixed last week, with gains in energy offset by declines in agriculture. The price of crude oil rose by 3% to just below $88/barrel, as did domestic natural gas prices. Ironically, natural gas prices in Europe have been falling, as inventories have been filled faster than many have expected prior to winter, which is a positive from an economic growth perspective. On the other hand, Russia has pulled back on an agreement allowing export grains from Ukraine, laying out an uncertain future for certain products.

Period ending 10/28/20221 Week (%)YTD (%)DJIA5.72-8.06S&P 5003.97-17.09NASDAQ2.25-28.59Russell 20006.02-16.85MSCI-EAFE4.13-23.23MSCI-EM-2.24-29.64Bloomberg U.S. Aggregate1.65-15.36

U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.12/31/20210.060.731.261.521.9010/21/20224.094.494.344.214.3310/28/20224.184.414.194.024.15

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.