- Equity markets rebounded sharply to all-time highs in October after a selloff in September
- The Federal Reserve will likely be tapering their asset purchases in November or December.
- International stocks have lagged the US all year but could draw more demand based on cheaper valuations and higher dividend yields.
Stock rebounded sharply in October after a steep decline in September. The S&P500 had its strongest month of the year, gaining 7.01%. For the year, the index is up 24.04%. All the domestic sectors were in positive territory with consumer discretionary (+10.94%) and energy (+10.36%) leading the way. Growth stocks outperformed value and small caps underperformed large caps. Strong earnings growth continues to propel stocks to all-time highs. According to BlackRock 80% of companies in the S&P500 which have reported third quarter earnings through the end of October have beaten expectations. While optimism in the stock market remains strong, supply chain disruptions remain a challenge with rising prices.
All eyes will be on the Federal Reserve meeting this week with expectations of bond purchase tapering to be announced. Short term interest rates will likely remain unchanged but less demand for longer dated bonds could push long-term yields higher. Fed Chairman Jerome Powell’s position is in question at a critical time as the Fed unwinds its massive fiscal stimulus in the face of higher inflation. Interest rates seem to be range bound with the 10-year Treasury yield ending October at 1.56%. It seems like higher yields are a foregone conclusion but yields across the globe remain low. Government bonds in Japan pay just a few basis points while Germany still has negative yields. The UK may be the first central bank to raise interest rates to combat rising inflation according to the Wall Street Journal.
International stocks continue to lag the US with the MSCI EAFE gaining 2.46% in October and 11.01% for the year. Cheaper stock valuations abroad may begin to draw more interest. JPMorgan’s Guide to the Markets shows that international stocks (MSCI ACWI) trade at just 14.5x forward earnings vs. 21.2x for the S&P500. Higher relative dividend yields outside the US could also attract more investment as investors deal with potentially higher bond yields and corresponding lower prices.
Sources: Morningstar Direct, Wall Street Journal, BlackRock