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Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending October 29, 2021 and month of October)

  • Dow Jones Industrial Average®:  +0.4% | +5.8% | +17.1%
  • S&P 500® Index:  +1.3% | +6.9% | +22.6%
  • NASDAQ Composite® Index:  +2.7% | +7.3% | +20.3%
  • Russell 2000® Index:  +0.3% | +4.2% | +16.3%
  • 10-year U.S. Treasury note yield:  1.56%
    - Down 8 basis points from 1.64% on October 22, 2021
    - Up 7 basis points from 1.49% on September 30, 2021
    - Up 64 basis points from 0.92% on December 31, 2020
  • Top three S&P 500 sectors in October:
    - Consumer Discretionary, +10.9%
    - Energy, +10. 2%
    - Information Technology, +8., 1%
  • Bottom three S&P 500 sectors in October:
    - Communication Services, +2.7%
    - Consumer Staples, +3., 7%
    - Utilities, +4.7 %

    *Past performance is not a guarantee of future results.

Equities cap off a strong October

After briefly retreating from recent highs, the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite all  set new records in the final trading day of October, buoyed by a steady stream of strong earnings reports. The S&P and NASDAQ posted their best months since November 2020. All S&P 500 sectors ended the month in positive territory. The 10-year Treasury yield fell during the week, but finished the month several basis points higher than where it started.

  • According to the U.S. Commerce Department, the U.S. economy grew at an estimated 2.0% annual pace in the third quarter, slowing significantly from the 6.3% and 6.7% registered in the first and second quarters. Consumer spending, a main driver of GDP, grew much more slowly in the third quarter than in the second as government stimulus waned and supply chain backlogs and the Delta virus surge weighed on growth.
  • Economists expect more robust growth to resume in the fourth quarter as virus cases dip below summer levels and holiday shopping season ramps up. Supply chain issues and inflation present downside risks to this forecast.
  • The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index calculated with volatile food and energy prices stripped out, rose 0.2% in September, down from 0.3% in August. This measure rose 3.6% year-over-year, unchanged from the year-over-year rate in each of the previous three months. Current figures remain at multi-decade highs.
  • The Conference Board’s consumer confidence index rose to 113.8 in October, above the 108.0 consensus and last month’s 109.8, as diminishing virus fears boosted optimism. Inflation concerns are high, but consumers still plan to spend on durable goods such as appliances and cars in the fourth quarter.
  • Durable goods orders fell 0.4% in September, snapping a four-month streak of gains, although economists expected a 1.0% decline. The weakness was primarily due to reduced orders for aircraft and autos.
  • Initial jobless claims fell to another pandemic-era low of 281,000. The pre-pandemic weekly average was 218,000. October’s official employment report will be released November 5.
  • September’s new home sales were 800,000, above the 760,000 expected, however pending home sales unexpectedly fell during the month, suggesting that climbing mortgage rates may be taking their toll.
  • Benchmark oil prices rose more than 10% in October, as drivers across the U.S. faced higher prices at the pump. Natural gas prices also remain elevated, though eased somewhat in October. While energy sector stocks benefitted, posting a 10% gain for the month, higher energy costs could be a consumer and business headwind in the months ahead.
  • The FDA authorized a lower-dose version of Pfizer’s vaccine in children 5-11 years old, which could reduce instability around school attendance and help increase labor participation rates.

Solid earnings season continues

Quarterly earnings continued to impress across most industries, while also flashing yellow lights about ongoing supply backlogs and price increases.

  • Microsoft topped estimates for net income by 30% thanks to strong demand for its cloud services. Amazon Web Services, Amazon’s on-demand cloud computing platform, performed well but Amazon fell short of earnings and sales expectations. The company also projected lower revenue for the fourth quarter than analysts expected and said spending to alleviate supply chain and labor challenges will trim profits.
  • Advertising strength helped Google parent Alphabet Inc. post its highest quarterly revenue in 14 years and nearly double its profit from the year-ago period. Apple was shy of sales forecasts for the quarter as semiconductor chip shortages led to supply constraints, though revenue nonetheless grew 29% year-over-year and the company met earnings expectations.
  • Social media companies continued to suffer from concerns that their advertising revenue would be hurt by Apple’s enhanced privacy features. Facebook, which announced a corporate name change to Meta, fell short of revenue expectations but topped earnings expectations. Twitter saw revenues grow but shares still fell 10% after user-growth figures disappointed analysts.
  • Coca-Cola beat revenue and earnings expectations and raised its full-year guidance as away-from-home sales improved. The company is also raising prices. McDonald’s, which beat sales and earnings expectations, is raising menu prices as it confronts higher commodity and wage costs. Wages at its restaurants are up 10% this year.
  • GM and Ford topped earnings expectations but reported ongoing challenges related to input costs and semiconductor shortages that could stretch into next year. Still, GM said full-year earnings would come in near the top of previous forecasts and Ford raised its full-year earnings guidance while reinstating its dividend, sending its stock up 10%.

Policymakers adjust monetary and fiscal policy

With economic growth continuing and inflation rising across the globe, policymakers are facing tough decisions about how and when to withdraw monetary support. The U.S. may also be nearing agreement on additional social and climate spending.

  • The Bank of Canada ended its asset purchase program and signaled an interest rate rise may come in the second or third quarter of 2022, earlier than previously forecast. The European Central Bank and Bank of Japan – which have long battled below-target inflation rates – left monetary policies unchanged.
  • The Fed will meet November 2-3 and is expected to announce a timeline for tapering asset purchases. The spread between 2-year and 10-year Treasuries reached its narrowest point in two months as investors positioned for declining asset purchases this year and for rate increases in mid-to-late 2022.
  • President Biden released details of a trimmed-down $1.75 trillion social and climate spending package as Democrats sought to bridge intra-party differences over the bill’s cost and taxes. Among revenue provisions, income and investment taxes would rise for multi-millionaires and some business owners; profitable companies would face a minimum tax rate; and a 1% excise tax would be imposed on corporate stock buybacks.
  • It is not yet clear when a final agreement will be reached or voted on. An infrastructure bill that would generate about $550 billion in new spending is also pending.

Final thoughts for investors

October proved to be a winning month for equities, boosted by impressive corporate earnings and signs that U.S. consumers are willing to spend even at higher prices if supply chains can keep up. Yet higher costs, shipping delays, product shortages, and ever-present virus concerns could prove challenging. An anticipated reduction in monetary support in coming months could also spark movements in asset prices. Speak with a financial professional about navigating uncertainty and staying on track toward your long-term goals.

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