A Fed Pause Would Bring Markets Applause
October Greenery:
Markets rallied late last week notching their biggest weekly gains since June on vague news about an eventual pause or slowing in the pace of rate increases by the Fed following their upcoming early November meeting.
- The S&P 500 rose 4.7% on the week after a sharp Friday rally that had the Dow rallying more than 700 points, while the S&P 500 and Nasdaq each jumped around 2.3%.
- The weekly gain pushed the S&P 500 back positive month to date. The S&P 500 is now up 4.7% for October with six trading days remaining. However, the index is still in bear market territory for 2022, down – 21% year to date.
- All 11 sectors of the S&P 500 rose last week. The market was led by an 8.1% jump in energy, a 6.5% climb in tech stocks, and a 6.1% gain in commodities.
- Other strong groups included consumer discretionary, up 5.6%, and communication services, up 5%. The smallest gain came in utilities, which rose just less than 2% on the week.
Treasury yields rose with the 10-year pushing above 4.3%, the highest level in 15 years, before falling Friday. The 2-year also rose to 4.5%. The market is now pricing a final fed funds rate between 4.5- 5%, before rate cuts start in 2h23. The greater than 400 basis point increase in the 2-year yield over the past year marks the largest move since the early 1980s.
Further Analysis:
Forward valuations have dropped over the past year, with the S&P 500 falling to near a 15.5 P/E from above 22 last summer.
Rate-sensitive areas of the equity market have finally come under heavy selling, with REITs down over 25% on the year and the usually stable utility sector dropping 13% after holding tough through the first 3 quarters of 2022.
Quarterly earnings came in generally above analysts’ estimates last week. Companies are noting labor challenges and supply chain issues; however, many are showing that they can combat these problems and many high-quality companies’ stocks had already fallen -25 to -50% into 3rd quarter EPS. They stepped over lowered expectations.
Stocks in Asia are down big this Monday with sharp selloffs in Hong Kong (-6.4%) and China (-2.9%), as investors digest the takeaways from the Party Congress and Xi remaining in power and reshaping its governing body. Reported China 3Q GDP and September industrial production came in ahead of expectations, while retail sales missed on the back of continued Covid shutdowns.
We do not have direct allocations to Chinese mainland equities although many multinational companies have large Chinese businesses.
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