Overview: Stocks were higher around the world last week as strong earnings in the U.S. and improving COVID-19 numbers encouraged investors. Financial and healthcare companies started the third-quarter earnings season strong, and economic data was generally positive. COVID-19 cases continue to trend downward, with the New York Times reporting the seven-day average for new cases at less than 84,000 as of Oct. 15. This is less than half of the recent peak of 175,000 reported on Sept. 13. For the week, the S&P 500 index was up 1.8%, with international developed stocks (MSCI EAFE) up 2.4% and emerging markets (MSCI EM) higher by 2.1% for the past week. In bonds, the 2-year and 10-year Treasuries closed at yields of 0.40% and 1.57%, respectively. Interest rates have been moving higher since September’s Federal Reserve meeting, as expectations of the Fed tapering of asset purchases is now expected to begin as early as next month. In economic data, initial jobless claims reached a pandemic low last week, dropping more than expected to 293,000 for the prior week. The four-week moving average fell to 334,000, its lowest since March 2020, as the recent employment report showed a decline in unemployment to 4.8%, down from the pandemic peak of 14.8% in April of 2020.
A Note on inflation: (from JP Morgan) After two consecutive disappointing monthly jobs reports, rising wages and inflationary pressures that look more persistent than expected, worries are mounting that the U.S. may be entering a period of “stagflation.” The term is often used to describe the 1970s when economic conditions were characterized by high unemployment and high inflation. Economists quantified this situation by compiling the “Misery Index,” which takes the sum of the unemployment and inflation rates. However, the Misery Index is nowhere close to its levels in the 1970s. We also don’t have the “stag” in stagflation. The overall labor market recovery has been robust and economic growth is set to be remarkably strong this year, despite a temporary Delta-driven slowdown. While union power was an important driver of the wage-price spiral in the 1970s, the decline in union membership and the impact of globalization make this kind of wage-price spiral unlikely. While supply chain strains may keep inflation elevated well into 2022, we do expect inflation to moderate toward the Fed’s 2% target and for growth to regain steam in the first half of 2022. As investors regain conviction, cyclical equities should re-take the baton from more defensive sectors. Nevertheless, we expect inflation in this expansion to be significantly higher than the last long expansion, presenting an opportunity for active management to select the companies most protected from these headwinds and levered to the growth trends of this economic cycle.
Weekly Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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