U.S. and International Equities
U.S. Markets Finish Lower
Markets worldwide were down sharply this week with the S&P 500 Index finishing lower by more than 1% for the fifth week in the past six. Investors continue to sell risk amid Q3 slashed earnings estimates and warnings. In addition, signs of a slowing economy are leading many traders to believe that the Federal Reserve (Fed) will inadvertently steer the economy into a hard landing as they attempt to curb present price pressures.
Market conditions are very bearish, which could be a catalyst for stocks if there were to be any positive news on the inflation or earnings front. Bulls in the latest Investors Intelligence report fell to 25.4% from 30% last week, which is the lowest reading for bulls since 2016. The American Association of Individual Investors (AAII) reading on bulls fell to 17.7% from 26.1% the week prior. This is the 44th consecutive week below the 38% historical average. The American Association of Individual Investors (AAII) reading on the bull-bear spread (bulls minus bears) is -40.8, the 8th most pessimistic weekly reading in the survey’s 35 year history. The only bull-bear spreads most pessimistic than this year’s occurred around the market bottoms in 1990 and 2009. Market conditions are quite bearish, which could be an excellent catalyst for stocks given positive news on the inflation or earnings front.
Fixed Income Pulls Back
The Bloomberg Aggregate Bond Index finished the week lower as bond investors continue to believe that inflation conditions will, most likely, remain resinous even amid the Fed’s hawkish stance this year. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, underperformed mirroring their equity counterparts.
The sell-off in the global rates markets last week pressured the U.S. high yield corporate credit markets as well. However, while we saw yields spike higher on Thursday in the global interest rates markets, the sell-off in the high yield market was much more orderly. High yield spreads (the additional compensation for owning riskier bonds) were only higher by 0.04% and, at current levels, are still not indicating that an economic slowdown/contraction is imminent. Corporate credit markets remain healthy, in our view.
Commodities Mostly Higher
Amid continued energy supply concerns stemming in Europe from the Russian invasion of Ukraine as well as worldwide oil increased in price this week. The metals had a positive showing bouncing back somewhat after falling week.
Economic Weekly Roundup
August Personal Consumption
Inflation in August came in stronger than expected despite the Federal Reserve’s efforts to slow price increases, according to August’s Personal Consumption report. The core personal consumption expenditures (PCE) price index, which excludes food and energy, rose 0.6% for the month after being flat in July. That was faster than many economists expected. Including gas and energy, headline PCE increased 0.3% in August, compared with a decline in July.
September Consumer Confidence
Consumer confidence in September defied investor sentiment as the three-month average jumped back up to triple digits. Inflation expectations fell for the third consecutive month. The Federal Reserve (Fed) will be pleased to see well-anchored inflation expectations. Consumers see a plentiful amount of jobs available and plenty of job openings could induce sidelined workers to re-enter the labor market. Tight labor markets and resilient consumers provide cover for the Fed to continue its aggressive tightening in November.
The Bank of England (BOE) released a statement this week in response to the significant decline of the British pound, which hit a record low of 1.03 versus the dollar on Monday. The BOE reiterated that they would not hesitate to raise interest rates to curb inflation at the next central bank meeting in November. As stated, “The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term.” A weak pound could exacerbate inflation in the U.K., which is already struggling with an energy price and cost of living crisis, as imports become more expensive.
Weekly Employment Report
Initial claims and continuing claims for unemployment insurance for the latest week both came in below the week prior. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Monday: BEA Total Light Vehicle Sales (Sep), Markit PMI Manufacturing (Sep), Construction Spending (Aug), ISM Manufacturing (Sep)
- Tuesday: Durable Orders (Aug), Factory Orders (Aug), JOLTS Job Openings (Aug)
- Wednesday: ADP Employment Survey (Sep), Trade Balance (Aug), PMI Composite (Sep), Markit PMI Services (Sep), ISM Services PMI (Sep)
- Thursday: Weekly Initial and Continuing Unemployment Claims
- Friday: Hourly Earnings (Sep), Average Work Week (Sep), Manufacturing Payroll (Sep), Nonfarm Payroll (Sep), Private Nonfarm Payrolls (Sep), September Employment, Wholesale Inventories (Aug), Consumer Credit (Aug)
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