October 29th, 2021
Despite its frightening reputation, October served up more treats than tricks for investors as we closed the last trading week of the month. Another strong batch of Q3 earnings results, combined with optimism that Congress was inching closer to finalizing a combined $2.8 trillion spending package, managed to push markets higher for the week and month. With 279 companies in the S&P 500 reporting, 82.10% beat expectations. That’s well above the long-term average of 66.00%. This helped propel the Q3 earnings growth rate to 39.20%. Revenue growth remains impressive, particularly given supply chain and labor constraints, rising 15.10%. Better than expected results and hopes for more spending to fuel growth in 2022 helped to offset weak Q3 GDP and personal income results. For the week, the S&P 500 rose 1.33%. The week’s gains helped lift the index to a 5.70% return in October.
GDP Slowdown Fails to Spook Investors
Supply chain constraints and a surge in Delta variant cases served as formidable headwinds to U.S. economic growth in the third quarter. GDP rose just 2.00% annualized, its weakest quarter of growth since the recovery began in mid-2020. Consumer spending, which comprises 69% of GDP, rose 1.60%. Spending on services remained strong despite the delta variant, rising 7.90%. Spending on goods, however, tumbled -9.20% as supply chain shortages kept cars and appliances off dealership lots and showrooms. Also holding back GDP was a drop in residential fixed investment and a surge in the trade deficit. Markets mostly shrugged off the weak print, simply chalking it up to supply failing to meet strong post-Covid demand.
Personal Income Dies While Consumers’ Spending Rises
Personal income fell -1.00% in September, cut by the end of extended government unemployment benefits in September. That resulted in the savings rate falling to 7.5% – its lowest since December 2019. The savings rate is now back in line with pre-pandemic levels. However, a rise in wages and salaries, which rose 0.8% in September, helped to offset some of the drop in personal income. The slump in personal income didn’t seem to faze consumers who were willing spend 0.60% more for the month. Going forward consumers will need to rely on wages and salaries along with personal debt to fuel their spending given that the excess savings appears largely tapped out.
It is rare for Octobers to be as favorable as 2021’s was. Earnings have been strong and there is a degree of optimism by investors over what a multi-trillion-dollar package will do for spending and the economy. To the extent Q3’s GDP figure was a disappointment, markets have taken it as a sign that there is ample demand and just limited supply, convinced those issues will work their way out in the end. That is probably correct, particularly now that delta is declining, vaccines are generally available, and treatment is improving. Next week is likely to be the beginning of the end for one of the major catalysts of the bull market however – near zero interest rates. While the Fed has telegraphed that it will keep rates low, the tightening cycle is almost certainly set to begin on Wednesday. Tightening cycles almost always result in some consternation – the introduction of a new variable that makes it more difficult for markets to assess whether changing macro factors are the result of fundamentals or the cost of leverage. This is not to say a recession is imminent, but it is worth noting that most modern recessions have been blamed on monetary policy. To the degree that the last year has felt like a golden era for markets (low rates, ample demand, massive savings reserves), 2022 is likely to feel more normal – or outright spooky in comparison.
The Week Ahead
A busy week ahead for markets with October nonfarm payrolls, manufacturing, and services reports on tap. Traders will also be tuning in to the Fed’s FOMC meeting for news on when the central bank intends to begin tapering its pandemic era bond-buying program.
Haunting Words of Wall Street
Sunday is Halloween, and to get into the spirit of the holiday, we’re taking a look at some spooky terms that haunt the world of finance and investing.