Updated: Nov 2, 2021
By; Andrew J. Willms
President and CEO
The stock market resumed its upward trend in October, following what could be generously described as a rough month in September, as corporations continued to report strong earnings for the most part. Meanwhile bond prices fell in response to inflation fears, which have been driving interest rates higher.
The economy has showed signs of weakening recently, and numerous threats remain, including a new bout of stagflation, supply chain bottlenecks, a tight labor market, rising energy prices, and Covid-19 variants.
The Commerce Department’s estimate of GDP growth for the third quarter adds credence to the suggestion that a sharp decline in economic growth could already be underway. The Department estimates GDP grew at a rate of just 2% in Q3, which is a sharp decline from the 6.7% increase for Q2. However, overall consumer outlays were up, as the decline in spending on goods was offset by an increase in spending on services.
Meanwhile, inflation continues to heat up. The personal consumption expenditures price index including food and energy increased 0.3% during September, pushing the year-over-year gain to 4.4%. That’s the fastest pace since January 1991.
Is a recession, or even worse, stagflation looming? That’s unclear at this point. However, should one take hold the Fed will have fewer arrows in its quiver to combat it, given all of the steps they have taken so far. I recently posted a podcast that discusses stagnation fears, which you can listen to HERE if you are curious to hear my point of view.
The labor market weakened in September, as employers added to their payrolls the fewest jobs since the beginning of the year. Nonetheless, the U.S. Bureau of Labor Statistics reported that the unemployment rate fell below 5% to 4.8%, as a growing number of former workers left the workforce.
Retail sales rose 0.7% in September, well above market estimates calling for a 0.2% drop. The increase in sales was broad-based with 11 out of the 13 retail categories increasing. Total retail sales have returned to near-record-highs, and remain significantly above their previous ten-year trend.
Prices continue to rise, with the Consumer Price index rising by 5.4% in September. Core CPI, which strips out the volatile food and energy sectors, rose by 4%.
Industrial production in the U.S. fell by 1.3% vs. August, which was far below expectations for a moderate 0.2% rise.
The Chicago Fed National Activity Index decreased to -0.13 in September from +0.05 in August. The index’s three-month moving average, CFNAI-MA3, also retreated to +0.25 in September, down from +0.38 that was reported in August.
Stock Market Highlights.
After the September swoon that produced the first 5% pullback of the year, the stock market regained its footing in October, with all of the major indexes posting positive returns for the month.
Investors have been encouraged by strong earnings reports from major banks, consumer companies and manufacturers, and by improving consumer optimism (as measured by The Conference Board).
Excluding financial firms, companies in the S&P 500 that announced results have boosted net-profit margins by 40 basis points to 12.4% from the previous quarter, according to data compiled by Bank of America Corp. The improvement has spread across major industries, with all but energy and consumer staples posting better margins.
Global stocks are still near all-time peaks, supported by a robust corporate earnings season so far, with profit margins widening on average despite cost pressures.
Bond Market Highlights.
Globally higher inflation rates, and a shift in policy to higher rates by some central banks, have led to a sharp rise in short-dated government bond yields.
At the same time, concerns about GDP growth have kept a lid on long-term bond yields, resulting in a “flattening” of yield curves, as the spread between the interest rates on short- and long-term bonds has narrowed considerably.
Federal Reserve Chairman Jerome Powell signaled the central bank is prepared to begin tapering its monthly asset purchases and warned that inflation is likely to remain elevated into 2022.
Commercial bankers seem to expect rates to rise and are trying to capitalize on today’s low rates before they do. The six largest U.S. lenders have issued some $314 billion of bonds so far this year, already the most for any year since 2008, according to Dealogic.
If you would like to hear more from me on recent market developments, please use this link to subscribe to my podcast.
Thank you for reading,
Andrew J. Willms, CWM, JD., LL.M.
 Most economic data lags by a month or so.