October 2022 Market Lookback

Despite a rough first half, October turned out to be a strong, risk-on month for financial markets. While official inflation measures remained stubbornly high, home price data & a big decline in Aug job openings raised hopes of disinflationary forces on the horizon. Q3 GDP came in at a strong 2.6%, despite being boosted mostly by volatile net exports. Treasury yields rose above 4.3% on Oct 21 before declining to finish the month. Company earnings remained resilient despite uncertain 2023 guidance.

Macro

•Q3 GDP grew 2.6%, as a surge in net exports offset a significant decline in residential investment & inventories growth.

•Sep CPI surprised to the upside on both a headline & core basis, coming in at 8.2% & 6.6% y/y and 0.4% & 0.6% m/m, respectively.

•Job openings fell by 1.1 million in Aug, the second-largest monthly decline since data began in 2000.

•Home prices continued declining on a m/m basis in Aug according to both the S&P/Case-Shiller 20-city composite (-1.3%) & the Federal Housing Finance agency (-0.7%).

Equities

•The S&P 500 briefly fell below 3,500 on Oct 13, but then rallied 10.9% to end the month at 3,872.

•After being revised down from $244 to $239 in September, consensus S&P 500 EPS estimates for 2023 ended October at $234.

•Emerging markets significantly underperformed developed markets due to Chinese stocks being down -5.4%.

•US equity funds saw $10.7bil in net inflows, driven by $13.3bn into large-cap—first month of large-cap inflows since July.

Fixed Income

•The 10-Yr Treasury yield rose from 3.82% at the start of the month to 4.33% on Oct 21, before finishing the month at 4.05%.

•High Yield (HY) bond funds saw $6.9bil in net inflows, the most in a single month since Jul 2020.

•HY spreads narrowed from 5.85% to 5.10% in October, while IG spreads hovered between 2.16%-2.28%.

Crypto

•Bitcoin’s 30-day volatility declined below the S&P 500’s 30-day volatility for the first time since July 2020 and the fourth time since Bitcoin began trading.

•Excluding the rebound of 70.3% in Jul 2022, Ethereum’s October return of 17.5% ranks as its best month since Oct 2021.

Winter Came Early for Housing

If not for net exports, GDP growth would have been negative in Q3. In fact, private domestic demand (i.e. GDP ex-Government, Trade & Inventories) grew just 0.1%. A big factor in that sluggish growth was the continued weakening in the housing market—residential investment declined 26.4% in Q3, after having already declined 17.8% in Q2.

While most segments in the residential market took a hit in Q3, the decline was concentrated in single-family structures (-36.3%) & brokers’ fees & legal costs (-40.7%). Single-family housing, which typically make up 35-45% of residential investment, tends to be more cyclical than other residential components. Brokers’ fees & legal costs, which cover 15-25% of residential investment, are highly dependent on activity, which data indicates are down 20-30% in the US since the start of the year.

Both have been significantly affected by the surge in mortgage rates and the severe drop in housing affordability & homebuilder sentiment. With rates set to stay elevated for an extended period of time, it’s possible this gets worse before it gets better.

FANG+ Stocks Falter

Though mega-cap tech stocks led the charge for much of the last two bull markets, October may be seen as the month where the tables truly turned. Some of the biggest & most well-known tech companies reported Q3 earnings this month and investors were mostly left disappointed. While Apple rose 7.6% after reporting, Amazon (-6.8%), Alphabet (-9.6%), Meta (-24.6%) and Microsoft (-7.7%) were not so lucky.

The NYSE FANG+ Index, an index that tracks highly-traded growth stocks, declined 6.4% in October while the equal-weighted S&P 500 rose 9.7%. The spread between the two of 16.1% represents the worst performance gap for FANG+ since its inception in 2014.

Before 2022, high-growth tech stocks benefited from ample liquidity and a low-interest rate environment. Yet, in an environment where growth is harder to come by & interest rates are significantly higher, conditions are ripe for an ongoing shift in market leadership.

Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.
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