Market Update for the Month Ending October 31, 2022
Posted November 8, 2022
Markets Rebound in October
Equity markets showed signs of improvement in October, helping offset September losses. The S&P 500 gained 8.1 percent during the month, while the Nasdaq rose 3.94 percent. The Dow Jones Industrial Average (DJIA) experienced the best month of the three major indices, soaring 14.07 percent. Although these solid results were encouraging, all three indices remain down for the year.
That positive performance coincided with improving fundamentals. As of October 31, with 53.6 percent of companies having reported actual earnings, the blended earnings growth rate for the S&P 500 in the third quarter was 3.8 percent, according to Bloomberg Intelligence. At the start of earnings season, the growth rate was expected to be 2.6 percent. Over the long run, fundamentals drive market performance, so better-than-expected earnings growth was an encouraging signal, even though its pace has slowed this year.
Although fundamentals were supportive during the quarter, technical factors were mixed. Both the S&P 500 and Nasdaq finished the month well below their respective 200-day moving averages, marking seven consecutive months with both finishing below trend. The DJIA, on the other hand, ended above trend for the first time since March. The 200-day moving average is an important technical indicator because prolonged breaks above or below this level can signal shifting investor sentiment for an index. Continued technical weakness for the S&P 500 and Nasdaq should be monitored.
International equities were mixed. The MSCI EAFE Index increased 5.38 percent, while the MSCI Emerging Markets Index lost 3.09 percent. Emerging markets were hurt by the stronger dollar and a sell-off in Chinese equities, which was caused by uncertainty surrounding the country's economic outlook. Technicals for developed and emerging markets were challenging; both indices finished below trend. In fact, they have ended every month this year below their respective 200-day moving averages, indicating continued investor unease with international stocks.
Fixed income markets continued to experience losses due to rising interest rates. The 10-year Treasury yield rose from 3.83 percent at the end of September to 4.1 percent at the end of October. That marked the first time the 10-year yield finished a month above 4 percent since May 2008, highlighting the rise in interest rates over the past year. The Bloomberg Aggregate Bond Index declined 1.3 percent.
Although investment-grade bonds experienced losses, high-yield fixed income fared better. High-yield credit spreads declined notably, dropping from 5.43 percent to 4.63 percent. Those declining credit spreads helped the Bloomberg U.S. Corporate High Yield Index gain 2.6 percent.
Interest Rate Uncertainty Remains
Interest rate volatility continued, as investors remained concerned about higher rates from the Federal Reserve (Fed) in the short term. The Consumer Price Index showed that consumer inflation accelerated, leading to higher fixed income yields due to expectations for additional Fed rate hikes. The central bank remains committed to tightening monetary policy to combat inflation, and additional increases are expected at its December and February meetings.
Until we see consistent evidence that higher rates are leading to less inflationary pressure, short-term interest rate uncertainty will remain. Although the impact of higher rates on equity markets was muted last month, we've seen how higher rates can hurt markets throughout the year, so continued short-term interest rate uncertainty presents a risk to markets that should be monitored.
Housing Continues to Slow
The housing sector is one area where we have seen direct evidence of a rate-induced slowdown. Existing home sales declined in September for the ninth consecutive month. The annualized pace of existing home sales is at its lowest since Covid lockdowns began in 2020, highlighting the slowdown in housing sales over the past year. Mortgage rates continued to rise, reaching 7.3 percent before retreating modestly to 7.22 percent. In a sign that the slowdown in sales has begun to affect prices, the Case-Shiller 20-City Composite Home Price Index fell 1.3 percent in August.
Although prices remain up year-over-year, the slowdown in sales and monthly decline in prices indicate that higher rates are starting to lower inflationary pressure in the housing sector. In the medium to long run, this should help support the Fed's attempts to combat inflation across the economy. At the moment, however, still-high prices on a year-over-year basis signal that further home price declines may be ahead.
Economy Remains Solid
Despite the slowdown for the housing sector, overall economic growth remained on track. The advanced estimate for third-quarter GDP showed that the economy grew at an annualized rate of 2.6 percent, better than economist estimates and an encouraging rebound after two quarters of contraction. This result was supported by better-than-expected personal consumption growth during the quarter, an encouraging sign that economic fundamentals remain solid.
September saw 263,000 jobs added, surpassing expectations. This helped drive the unemployment rate to a pandemic-era low of 3.5 percent during the month. The job market, an area of strength throughout the economic recovery, has helped support gains in personal income and spending this year. September's personal spending report showed that consumer spending held up well. In fact, as shown in Figure 1, consumer spending remained resilient during the month and has been largely consistent this year, other than a decline in July.
Figure 1. Personal Spending, October 2019–Present