The expansion of the U.S. economy hit its slowest pace since the recovery began, with Real GDP for the third quarter coming in at 2.0%. In last month’s recap we mentioned the steady decline in expectations for economic growth between the end of July and the end of September as both supply chain issues and a resurgence in Covid cases driven by the Delta variant acted to constrain growth. As the Delta wave now appears to be past its peak, with cases, hospitalizations and deaths all trending downward, GDP growth is expected to resume as we close out the final months of 2021.
Real GDP Graph
Source: FRED Economic Data. www.fred.stlouisfed.org; Federal Reserve Bank of Atlanta. www.atlantafed.org/cqer/research/gdpnow
On the inflationary front, the Consumer Price Index (CPI) rose by 5.4% in September from a year prior. This is the fourth consecutive month where the headline CPI has remained above 5%. The last time inflation remained consistently at these levels was in late-1990 through early-1991.
The Stock Market
Equity Market Returns
Source: Bloomberg Finance, L.P.
Stocks resumed their upward trend in the month of October, after a relatively short-lived pullback in September. The S&P 500 rebounded by just over 7% during the month, reaching new all-time highs and bringing the total return to 24% so far in 2021. The market’s advance continues to be supported by strong momentum in underlying earnings. So far, with over half of S&P 500 companies reporting, earnings are up 36.6% year-over-year according to FactSet Research. For the full-year 2021, analyst estimates are for earnings growth of over 40%. For 2022, FactSet also reports earnings are currently expected to advance another 8.1%. With the strong advance in earnings this year, the price-to-earnings ratio (P/E – a common valuation measure for the stock market) has contracted from 26.7x at the end of 2020 to 22.6x estimated earnings for the full year 2021.
Other major market indices were all up for the month, with the NASDAQ slightly beating out the S&P with a return of 7.29%. International performance was positive as well, with the MSCI EAFE and the MSCI Emerging Markets up 2.5% and 1%, respectively. So far this year, Emerging Markets remain in negative territory, lagging the rest of the global equity indices.
Fixed Income
FRED
Interest rates rose in the month of October, with the 10-year U.S. Treasury yield touching 1.70% before retreating slightly to 1.57%. Much of the rise in recent weeks can be attributed to forward-looking inflation expectations. The 5-year Breakeven Inflation Rate in the chart above suggests that investors expect the Consumer Price Index will average nearly 3% over the next five years. That’s the highest level seen for this measure over the past decade, and a significant increase from where it stood during the early days of the pandemic. However, longer-term inflation expectations are expected to moderate back towards 2% over the following five years. Lingering concerns over supply-chain disruptions on top of record levels of stimulus to combat the economic fallout from the Covid-19 pandemic are the primary culprits of rising prices. The coming months will shed more light on the market’s perception of the Federal Reserve’s ability to bring inflation back down.
Conclusion
Interest rates and stock prices continue to adjust to the current environment. Markets seem to have pretty much forgotten about what was making them nervous in September with October having more than made-up for the loss. Markets may not always make amends as readily; however, we continue to believe in remaining invested for the long-run and avoiding the temptation to guess where the market may be headed over the near-term.
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