The latest market concerns for investors

S&P Market Overview and Insights

• Equity markets recovered last week, as a temporary debt ceiling deal removed the disaster scenario of a U.S. default out of investors’ minds. The bounce was a reminder that the buy-the-dip mentality continues. After losing in three of the previous four weeks, the S&P 500^® Index gained more than 1%, delivering its best week since June. Overall, the market remains in a zig-zag pattern, with the S&P 500 unchained since July despite returning 18% for the year. Technical factors, including momentum, breadth and sentiment remain a challenge for markets. Over the past month, value has regained control versus growth, and small caps are beating large caps.
• Interest rates continue their march higher on incremental hawkishness from the Fed, with the 10-year Treasury yield at the highest level since May at 1.61%. Returns for mortgage-backed securities are mostly negative this year on higher rates and the looming taper. A disappointing jobs report was insufficient to change the minds of investors that a Fed tapering is on the way. Inflation expectations are contributing to the recent surge, with the 10-year breakeven inflation rate derived from TIPS at 2.5%, the highest level since May.
• The stall in estimate revisions due to supply chain issues and surging inflation combined with higher interest rates are challenging the justification for elevated market valuations.

Weekly Market News

• Inflation has been a concern through much of 2021, driven by challenged supply chains and labor shortages, but the surge in energy prices is driving inflation from a different flank. Crude prices have soared nearly 70% this year to a seven-year high of $82. Natural gas has more than doubled and is near a 13-year high driven by energy demand, while coal has hit record levels, up four times the level from the Spring. High energy prices are a tax on consumers, particularly low-income families which spend roughly 10% of income on energy needs.
• September nonfarm payrolls rose by a disappointing 194,000, below the estimate of 479,000 and August’s reading of 366,000. Despite the weakness, the unemployment dropped to 4.8% (lowest since before the pandemic) from 5.2% last month as the labor force participation rate fell. Average hourly earnings were up a strong 4.6% from a year ago. The disappointment is being blamed on lingering Covid-19 issues impacting behaviors and childcare, the wealth effect driving greater retirements, and sluggish youth employment. Expectations for economic growth are moderating, as inflationary pressures and lingering COVID-19 pressures impact consumer spending. Economic growth is expected to slow, with the 6.6% growth in the second quarter now forecast to slow to 1.3% in the third quarter, per the Atlanta Fed’s GDPNow model.
• Investor attention will shift to earnings next week, with several high-profile banks reporting. Growth for the S&P 500 is forecast to rise nearly 30% from a year ago, marking the third-best quarter since 2010. Estimates were revised higher through the quarter for the fifth-straight quarter (longest streak on record), though revisions turned lower in September as supply chain issues and input cost pressures remained unresolved. Ten of the eleven sectors are expected to show growth, led by energy, materials, industrials, and technology. A downside of earnings season for equity markets is that companies are precluded from repurchasing shares between quarter-end and the release of results, stunting buying pressure.

Market Trends to Watch

• Inflation will again be in focus this week, highlighted by CPI on Wednesday and PPI on Thursday. Other notable data include NFIB Small Business and JOLTS job openings on Tuesday, and retail sales and consumer sentiment on Friday. The minutes from the recent FOMC meeting will be released on Wednesday.