October turned out to be the best month of the year for the S&P 500 Index, so far. Equities were up 7.01% for October. With inflation steadily increasing and bond yields elevated, one of the better asset classes to invest in right now is equities. With much of the COVID fears having subsided, at least among economists, the primary fear going forward is the supply chain crisis and Fed policy.
The Fed will hold their Open Market Committee meeting this week and just about everyone expects Tapering to be announced on Wednesday. The only question remains - will tapering begin immediately or in December, as was previously thought? Now, even Goldman Sachs is forecasting the 1st interest rate hike by the Fed to be middle of next year as opposed to 2023. This will be an important meeting for the Fed and the statement from the meeting will likely be one of the more analyzed statements since 2020. How the market interprets the statement could add to some choppiness in trading this week - both in bonds and in equities.
Last week was actually a very positive week overall for the economic releases. The Dallas, Richmond, & Kansas City manufacturing indices were all higher month-over-month, which bodes well for that sector as it has struggled of late. New Home Sales were higher, though Pending Home Sales declined. Personal Spending was up and Consumer Sentiment edged higher. Personal Income declined and GDP overall was lower. This had much to do with consumers being careful leading up to the holiday season and continued issues with the supply chain.
We are in a precarious situation at this point. Inflation is a considerable risk, but not higher enough to hurt equities (yet). Yields are rising and likely to continue rising with Tapering due to begin and a possible rate hike earlier than expected. Equity valuations are a bit stretched, so without considerable improvement in the supply chain and labor shortages, equities could get expensive as we head into 2022. The Labor Market report due out on Friday will be critical to see if hiring is taking place in key industries related to transportation and shipping.