Stocks rebounded in October, with the S&P 500 gaining 8% and the Dow posting its largest monthly gain since 1976, up 14%. Bond markets stabilized following the U.K.’s abrupt fiscal policy turn towards less deficit-financed spending. For over a decade, bond markets rarely reacted significantly to governments borrowing heavily to fund larger deficits. With high inflation and rising interest rates around the world, governments are recognizing, as the UK did, that investors’ appetites for financing debt are becoming more limited.
The US dollar index was down slightly in October following the recovery of the British Pound but remains up 16% year-to-date. With the third quarter earnings season underway, multinational companies are highlighting the stronger dollar’s impact. Revenues and earnings in depreciated foreign currencies are less valuable in US dollars, weighing on growth and overall results. A steadier or weaker dollar would be welcome news for US stocks with significant overseas operations. We have correlated the dollar to the S&P 500 and found a meaningful relationship, in which a stronger dollar tends to coincide with a weaker stock market.
Third quarter Gross Domestic Product (GDP) data was released on October 27th. The economy grew 2.6%, as consumer spending grew modestly, the trade deficit narrowed, residential investment contracted, and nonresidential investment (industrial equipment, software, R&D, etc) continued to expand. The labor market continues to remain very tight. The unemployment rate was just 3.5%, near historic lows, in September. Job openings and quits have declined slightly in recent months, a sign of some loosening in the labor market, but remain very high relative to history. It’s important to emphasize that the labor market often works on a lag to economic and financial market data. Said another way, economic data, and financial market data like stocks and interest rates, tend to move before the labor market. Higher interest rates can take time to work through the economy by slowing demand and eventually the labor market. Months into the current rate hiking cycle, the labor market has thus far been very resilient. The months ahead will be telling in how the economy digests the impact of higher interest rates.
-Jared J. Ruxer, CFA, MS