U.S. and International Equities
Major Markets Mixed
The major equity markets finished the week mixed. In the U.S., all major averages were higher though gains were larger for the S&P 500 and Nasdaq than for the blue chip Dow Industrials and Russell 2000 small cap index. Both the developed markets (MSCI EAFE Index) and the emerging markets (MSCI EM Index) finished the week lower, with the emerging markets giving back the most of the major markets. China’s challenges remain in the minds of investors as the country is dealing with energy shortages as well as commercial real estate indebtedness.
Earnings, Earnings, Earnings,
As we get through the thick of Q3 earnings season with approximately half of the S&P 500 reporting, so far over 80% of companies have exceeded earnings estimates. Financial companies, which make up the bulk of early reporters, have surprised on earnings by a strong 19% on average, compared with 10% overall. Moreover, the Bloomberg consensus estimate for S&P 500 earnings for the next four quarters has risen by about 1% during earnings season, led by the energy, financials, and materials sectors.
Fixed Income and Commodities Recap
Bonds Reverse Course While Commodities Ended Mixed
The Bloomberg Barclays Aggregate Bond Index finished higher as yields declined, reversing last week’s negative return, as investors took advantage of last week’s selloff. High-yield corporate bonds, as tracked by the Bloomberg Barclays High Yield index, continued their trek higher for a third straight week as their yields declined.
Natural gas price rallied from last week’s pullback as some investors took advantage of positive fundamentals. Oil declined slightly, breaking five straight weeks of gains amid worldwide supply concerns, while the metals gave back ground this week.
Economic Weekly Roundup
GDP Fell Short of Expectations
According to the Bureau of Economic Analysis, the U.S. economy grew at a 2.0% annualized rate in the third quarter, which slightly missed the Bloomberg consensus forecast. Personal consumption, the largest part of the economy, rose 1.6%, which was double what was expected, but the reading was down sharply from last quarter’s over 10% reading due primarily to the impact of the COVID-19 Delta variant. Supply chain constraints weighing on growth were most evident when analyzing goods versus services breakdown.
The Conference Board’s October consumer confidence came in well above economists’ expectations. Even with the high reading of this month’s confidence, it is still below pre-COVID-19. Higher energy prices may eventually put a dent in future readings, however, we see no signs of that happening right now. Moreover, LPL Research believes ebbing COVID-19 cases, an improving job market, and significant savings are supporting confidence and may drive accelerating consumer spending in coming months.
Consumer Spending Solid
The core personal consumption expenditures deflator (PCE), which is the Federal Reserve preferred inflation excluding food and energy prices, increased 3.6% year over year in September, which was in line with economists’ consensus. Personal income declined 1.0% in September, which was well below economists’ consensus forecast for a 0.3% decrease. Expiration of unemployment benefits are a potential contributor in the income decline, possibly driving consumers to dip into their savings.
The following economic data is slated to be released during the week ahead:
Monday: Markit October PMI Manufacturing Report, Institute for Supply Management (ISM) October Manufacturing Report, September construction spending
Wednesday: Federal Open Market Committee (FOMC) meeting, Bureau of Economic Analysis (BEA) October auto sales, ADP October Employment Survey, September durable and factory orders, ISM October Non-Manufacturing Report.
Thursday: Weekly initial and continuing unemployment claims, September trade balance, Q3 productivity and unit labor costs.
Friday: October unemployment report, hourly earnings, average workweek statistics, and manufacturing and non-farm payrolls, September consumer credit
Also next week is another busy week of earnings results with more than 160 S&P 500 companies slated to report third quarter results.
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