Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank.
Domestic equities closed last week at all-time highs with October posting another strong month. The Dow Jones Industrial Average was up 0.4% for the week, the S&P 500 gained 1.4%, and the NASDAQ increased by 2.7%. U.S. stocks have enjoyed strong gains year to date with the Dow up 18.8%, the S&P 500 up 24.0%, and the NASDAQ up 20.9% through the end of October. The U.S. 10-year Treasury yield ended the week at 1.56%, down seven basis points from the previous Friday’s close. Gold was down 0.5%, ending the week at $1,783/oz. West Texas Intermediate Crude Oil fell 0.5% to end the week at $83.34/barrel.
Positive developments that lead to last week’s equity market rally revolved around the strong demand highlighted by companies across a wide range of industries that reported third quarter earnings results. The demand dynamic helped keep earnings and profit margins elevated in the face of supply chain and input price pressures. According to FactSet's Earnings Insight, with over half of the S&P 500 Index having now reported, the blended year-over-year earnings growth rate for the third quarter stands at 36.6%, the third highest in over ten years, trailing only the prior two quarters. In aggregate, companies have reported earnings 10.3% above expectations, well ahead of the 8.4% five-year average positive surprise rate. Companies from a broad range of industries highlighted a strong demand backdrop, while price increases and productivity initiatives also continued to help to keep profit margins elevated in the face of supply chain and input price pressures. Investors continue to remain concerned with potentially peak profit margins, particularly with the pickup in corporate commentary surrounding labor shortages.
The domestic economic calendar was busy last week with several noteworthy releases. The U.S. economy expanded at a 2.0% annualized rate in the third quarter, below estimates for 2.6% growth and a slowdown from the second quarter's 6.7% expansion. The spike in COVID-19 Delta variant cases in the quarter were a major factor in the slowing of the economy. Personal consumption beat estimates at an annualized growth rate of 1.6% but came in well below the second quarter's 12.0% growth. Core personal consumption expenditures (PCE), the Fed's preferred measure of inflation, rose at 4.5% annualized quarter over quarter for the third quarter. While higher than the Fed’s longer-term 2% average goal, this was a slowdown from the 6.1% inflation print in the second quarter. The FHFA housing price index rose 1.0% month-over-month in August, which was less than estimates of a pick-up of 1.5%. The number was driven down primarily by prices in New England and the Mid-Atlantic regions. Finally, capital goods orders rose for a seventh straight month, signaling strong capital investment.
In the week ahead, all eyes will be on the U.S. Federal Reserve’s Wednesday announcement. The Fed is widely expected to announce that it will begin tapering its $120B of monthly asset purchases, likely starting in mid-November, potentially at a pace of $15B per month, with a goal of ending in June 2022. Perhaps most importantly, Fed Chair Powell is expected to reiterate the distinction between tapering and interest rate tightening decisions and note that any discussion about the liftoff in short-term interest rates will not take place until the asset tapering is complete. Also this week, third quarter earnings season continues with CVS, Moderna, and Peloton as some of the notables reporting. Finally, a bevy of U.S. economic data will be released this week including ISM Manufacturing, ADP Employment Change, Factory and Durable Goods Orders, the Change in Nonfarm Payrolls, and the Unemployment Rate.
As always, we will be watching and reporting to you next week. Thank you.
