U.S. and International Equities
Major equity markets sold off this week amid geopolitical tensions and the impact of higher rates on the economy. Federal Reserve (Fed) Chair Powell’s “higher-for-longer” message put upward pressure on interest rates while fears of escalation in the Middle East lifted West Texas intermediate crude oil over $90 per barrel and sent gold prices near $2000. Earnings results have come in mostly better than anticipated, including well received results from Netflix (NFLX) and American Express (AXP), but have been overshadowed by macro developments.
According to the most recent AAII Sentiment Survey, the percentage of bullish investors declined from 40% to just over 34%, below the historical long-term average of 37.5%. This week bearish investors declined to 34.6.5%; however, the latest reading remains above the 31% historical average. Neutral investors jumped to 31.3% from 23.5%, just below its historical average.
Fixed Income Higher
The Bloomberg Aggregate Bond Index ended the week solidly lower as investor concerns over the Fed’s higher-for-longer increased amid Powell’s comments. In addition, high yield bonds lost ground this week.
High yield bond yields and spreads rose over the past week amid elevated rate volatility, limited capital market activity, and a third consecutive $2+ billion weekly retail outflow. High yield bond yields and spreads rose 0.12% and 0.13% over the past week and are now 0.64% and 0.43% above where they stood on September 14. Despite the higher spreads recently, LPL Research still does not like the risk/reward for the asset class.
Commodities had a mixed week amid the recent geopolitical crisis in the Middle East. The International Energy Agency last week described market conditions as “fraught with uncertainty” but stated that the Israel-Hamas war had not yet directly impacted physical energy supplies. That being said, traders are anticipating higher energy prices amid the tensions. Gold and silver also caught a bid as investors look to safe havens given the geopolitical tensions.
Economic Weekly Roundup
October’s Federal Reserve Beige Book noted that business activity slowed from last month but remained stable. Consumer spending was mixed since last month, especially among general retailers and auto dealers, due to differences in prices and product offerings. Some districts reported slight slowing in consumer travel.
Delinquency rates have increased lately, although still historically low. Most Districts still reported ongoing challenges in recruiting and hiring skilled labor so investors should still expect downside pressure on unemployment. Businesses struggled to pass along cost pressures because consumers had grown more sensitive to prices. As a result, firms struggled to maintain desired profit margins.
September Retail Sales
Retail sales increased 0.7% month over month after rising 0.8% month over month in August. Investors got an early look into economic activity in September and the economy continues to grow as business leaders indicated in recent earnings calls. Amazon’s prime days in October will likely support a strong retail sales report in the following month as consumers continue to spend amid a healthy job market.
Moreover, consumers returned to the car lots, making September the best month since May for auto dealers. With that being said, rising use of credit and early signs of delinquencies could dampen some of the enthusiasm. The strong retail sales figures do not change market expectations that the Fed is likely done raising rates in this cycle.
September Housing Starts
September housing starts rebounded off of last month’s lows as homebuilders make up for low inventory. Housing starts increased 7% month over month as homebuilders work to meet the demand for housing. Despite the uptick in September, the level of homes under construction is likely too low for the growing number of millennials looking for housing. Investors should know that the low supply of existing homes on the market provides a favorable backdrop for homebuilders amid low inventory. Low supply of available homes on the market will likely keep prices elevated, despite the Fed’s efforts to cool the economy and suppress housing inflation.
Weekly Employment Report
Initial and continuing claims for the latest week came in above economists’ consensus expectation as well as the prior weeks print. We believe the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
- Tuesday: Purchasing Managers Index (Oct), S&P Global PMI Manufacturing and Services (Oct)
- Wednesday: Building Permits (Sep), New Home Sales (Sep)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Durable Orders (Sep), Q3 GDP, Wholesale Inventories (Sep), Pending Home Sales (Sep)
- Friday: BEA Total Light Vehicle Sales (Sep), Personal Consumption Expenditures (Sep), Personal Income (Sep), Michigan Sentiment (Final)
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