Markets were not spooked by last week’s inflation and yield curve data, and instead focused on generally positive corporate earnings. The S&P 500 gained 3.97% and bonds rallied for a gain of 1.65% for the Bloomberg Aggregate Bond Index. Strong results from several leading industrial, consumer staples and energy companies rightfully caught investors’ attention1. Apple’s earnings helped as well. Nearly 70% of companies reporting Q3 earnings so far have beaten both top- and bottom-line expectations1. Earnings, resilient economic growth, and a seasonally strong period for equities historically pushed the S&P 500 to gain of 5.02% in October.
Nonetheless, we think investors need to remain balanced and patient in this environment. The 10-Year Treasury yield slipped below the 3-Month Treasury yield last week, which has historically been a recession indicator. Likewise, the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Index, increased by 0.5% in September and 6.2% year over year, numbers still far too high for the Fed’s liking2. The significant increase in interest rates year to date driven by Fed policy to fight this inflation has led to significant volatility. Current inflation data, along with continued tight labor markets, likely gives the Fed more room to continue raising interest rates at its meetings this coming week and in December. We think the Treasury yield curve is now suggesting the Fed may have to drive the economy into recession to stamp out inflation. In recessions, earnings typically fall in aggregate, which we’ve not seen yet. But that may be the case for 2023. We don’t think investors should be spooked by this information or make rash decisions. Rather, investors must make prudent preparations with financial planning and portfolio balancing. We welcome the recent rally in equities but believe the volatility we’ve witnessed for most of 2022 will return to haunt us again. Happy Halloween!
Thank you for your confidence in our team,
Asset Management Department
Sequoia Financial Group