Equity markets rose as investor sentiment digested a flurry of economic news and third-quarter earnings. The energy and industrial sectors advanced and outperformed growth, which was weighed down by weak earnings announcements from several internet mega-caps, including Microsoft, Amazon, Alphabet and particularly Meta Platforms. The Bank of Canada’s decision to increase rates by 0.50% instead of the expected 0.75% surprised the market and fostered hopes that the Fed may follow suit with a less aggressive rate increase. European stocks rose, hoping the ECB might slow rate increases after raising rates by 0.75% to 1.5%.
Economic data during the week was a mixed bag of conflicting news. Earnings were closely watched, with 52% of S&P 500 companies reporting. Seventy-one percent have reported positive earnings surprises, and 68% of the reporting companies reported positive revenue surprises. The blended earnings growth for Q3 is 2.2%, with an aggregate year-over-year increase in earnings of $10.1 billion. However, reported earnings were skewed by the energy sector, reporting earnings growth of 134% or $33.0 billion. Ex-energy, the S&P reported earnings would be a decline of 5.1% instead of an increase of 2.2%. Some analysts expect energy to be the most significant contributor to earnings growth for all of 2022. Ex-energy, the expectation is for earnings growth of 0.6% instead of a year-over-year increase of 6.1%.1
On Monday, S&P Global reported the U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 47.3 in October from 49.5 in September. The manufacturing sector increased slightly to 50.7 in October compared to 50.6 in September. (A reading of 50 and above indicates an expansion and below 50 a contraction). The U.S. flash services sector decreased in October to 46.6 from 49.3 in September. “The U.S. economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply,” S&P Chief Business Economist Chris Williamson said in a statement. “The decline was led by a downward lurch in services activity, fueled by the rising cost of living and tightening financial conditions.”2
On Tuesday, the S&P Core Logic Case-Shiller 20-city house-price index fell 1.3% in August after falling in July. Price appreciation year-over-year increased by 13.1% but has been slowing since the April peak of 21.2%. The largest declines month-over-month were on the west coast.3 In a separate report from the Federal Housing Finance Agency, home prices fell 0.7% in August following a drop of 0.6% in July. The recent two-month decline marks the first time the FHFA index has fallen for two consecutive months since March 2011. Housing has declined since the peak in the spring as mortgage rates have climbed and buyers are becoming scarce.4 Also on Tuesday, the Consumer Board released the October consumer confidence Index showing a decrease to 102.5 from 107.8 in September. The Present Situation Index and the Expectation Index declined in October to 138.9 from 150.2 last month and 78.1 from 79.5, respectively. According to the Conference Board, reading the Expectation Index below 80 is associated with recessions.5
On Wednesday, the U.S. Census Bureau and the Department of Housing and Urban Development reported sales of new single-family houses in September were seasonally adjusted to an annual rate of 603,000 from the August revised rate of 677,000. This latest reading is 10.7% below the August estimate and 17.6% below the September estimate.6 On Thursday, initial jobless claims increased to 217,000 from last week’s revised level of 214,000. Continuing claims for all programs decreased by 2,354 from the previous reading.7 Also, on Thursday, the BEA reported the advanced estimate of real gross domestic product increased at an annual rate of 2.6% in Q3 after two consecutive negative quarters. The GDP reading was impacted by the increase in exports and the decrease in imports. Within exports, the leading contributors included an increase in industrial supplies and materials (petroleum and nondurable goods). Consumer spending remained stable with a slight increase of 1.4%.8
On Friday, the PCE price index came in with an increase of 0.3% and the core rate ex-energy and food increased at 0.5%. On an annual basis, the PCE is holding at 6.2%, while the core rate increased at 5.1%. Personal income rose 0.4%, disposable income increased 0.5%, and the savings rate as a percentage of disposable personal income was 3.1%.9
This week the market will wait in great anticipation for the FOMC announcement on interest rates and the subsequent press conference with Fed Chair Jerome Powell. At this week’s meeting, the consensus has already priced in a 0.75% increase. Still, the tone and language in the press conference will determine investor sentiment and market action over the next several weeks. We can only hope Chair Powell will acknowledge the data is lagging and the aggressive tone on rate increases of the previous meetings will be softened.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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