Equities On The Move
October is shaping up to be a strong month for equities.
Consumers are holding up the U.S. economy, but for how long?
Rising yields and increasing inflation make equities more attractive than other asset classes.
So far, October is turning out to be a good month. Historically, October is the 2nd worst month of the calendar year for the S&P 500 Index. However, the index is up 5.6% through the 1st three weeks of the month. With inflation rising and bond yields increasing, stocks are likely one of the better asset classes to own in the near future.
The Fed's Beige Book showed a decline in economic growth in the Sept-Oct period versus the Aug-Sept period. The Central Bank's report specifically pointed to labor shortages and shipping bottlenecks as the primary causes of the slowdown, as opposed to what policymakers would have you believe.
There was some reprieve on shipping costs as the Global Baltic Dry Index has declined 21% since peaking on October 7th. However, the index is still up 211% year-over-year. Despite the new 24-hour operation of key ports, there is little-to-no evidence that shippers are taking advantage of the red-eye shifts. At this point, the shipping backlog does not appear to be going away anytime soon.
While 3rd quarter earnings are coming in strong, forward guidance from companies regarding holiday spending has been negative. If the U.S. consumer, who makes up two-thirds of GDP, cannot get key goods that they need/want, discretionary spending is likely to take a hit.
This could hurt future economic growth, which is why Deutsche Bank's latest survey of investors & economics shows the #1 concern going forward is higher inflation/yields and #3 is declining growth. Back in April, the #1 concern on the list was COVID variants, now COVID is #4 on the list.
With rising yields and increasing inflation, equities now appear to be the better investment choice over bonds. Adjusted for inflation, cash and bonds have a negative return. Even though equity valuations are stretched, equities provide a better return total return at the moment, when adjusted for inflation. If Continued Claims continues to drop at the current pace, labor shortages could correct within a matter of months. Transportation and warehousing are the key industries where jobs need to be added.