Equities Gain on Cooling Inflation
Equity markets soared last week amidst a better-than-expected inflation reading. Global equities (represented by the MSCI All Country World Index) were up 6.59%, and domestic stocks (represented by the S&P 500 Index) were up 5.93%. This weekly performance was the best since June for the S&P 500 and the best since March for the tech-heavy Nasdaq, up 8.11% for the week.
The strong gain mainly occurred on Thursday following the Bureau of Labor Statistics release of the US Consumer Price Index (CPI). US Core CPI (excluding food and energy) rose 0.3% for the month of October and 6.3% on an annual basis, both below consensus expectations of 0.5% and 6.5% respectively. Core goods inflation slowed with apparel, household furnishings, and auto prices decelerating. Housing costs remained high which kept services inflation higher, but rent and owners’ equivalent rent did decelerate month-over-month. Other bright spots within services showing cooling inflation include drops in car rentals, airfare, and vehicle maintenance and repair. The report gave hope that inflation has now peaked and may change the pace of the Fed’s future interest rate increases.
As investors assessed the inflation report, bond prices rose as the probability the US Fed would scale back rate hikes increased. As bond prices and yields move inversely, the yield of the 10-year US Treasury bond fell to a low of around 3.82% on Thursday. For reference, the yield ended the previous week at around 4.16%.
With quarterly earnings season coming to a close as around 91% of S&P 500 companies have reported, analysts have dialed back Q4 expectations after many companies provided negative earnings guidance. According to FactSet, analysts’ expectation for Q4 earnings on average for S&P 500 companies is a decline of 1.0% compared to their earlier forecasts from September of a 3.9% growth rate.
The week ahead is slated to provide plenty of insight into the retail sector as US retail sales are scheduled to be released Wednesday, and retail names such as Walmart, Home Depot, and Target are on the calendar to report Q3 earnings.
I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.
S&P 500: The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.
Russell 2000: The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of the 2,000 smallest publicly traded U.S. companies based on in market capitalization. The Index is a subset of the larger Russell 3000® Index.
MSCI All Country World Index: The MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets
(EM) countries. With 2,937 constituents, the index covers approximately 85% of the global investable equity opportunity set.
GDP: Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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