October Economic Update
The stock market hit a pocket of turbulence in September, with investors turning cautious amid Delta variant infections, slowing economic growth, rising interest rates, and ongoing policy debate in Washington. This unease culminated in the market’s reaction to news that a large, heavily indebted real estate company in China was in danger of defaulting on its debt payments - a prospect that could lead to the company’s bankruptcy. The Dow Jones fell 4.29%, the S&P 500 Index lost 4.76%, and the Nasdaq Composite dropped 5.31%. (1)
Investor sentiment deteriorated throughout the month. Weighing on stocks was uncertainty about future inflation increases, the Federal Reserve Bank’s tapering plans, the fiscal and tax policy proposals being debated in Washington, and the economic growth implications of continuing supply bottlenecks.
Volatility increased towards the end of the month as the 10-year Treasury yield climbed. The reality of a more hawkish Fed finally hit the bond market, sparking a sell-off in bonds that sent yields higher. Higher yields hurt technology and other high-growth companies, and that weakness spread to the broader market. This is due to higher interest rates impacting value of a company's future cash flow, which thereby impacts valuation pricing. Technology and other high-growth stocks felt the bump in yields, which added to losses as the month closed.
Congress added to the market uncertainty. It was unable to advance an infrastructure bill, and it made little progress on the debt ceiling agreement. After a sell-off to close out September, stocks surged on Friday on news of a potential Covid-19 oral therapeutic, an easing of yields, and reports that President Biden was traveling to Capitol Hill to help break the logjam on legislation
Fed Chair Jerome Powell was at the center of two news developments last month. The first was the announcement by a prominent senator opposing Powell’s renomination, heightening market uncertainty over the leadership transition when his term expires in February 2022. (2)
Powell later made comments at a European Central Bank event, admitting that the current bout of inflation may last longer than he and many other central bankers have previously expected. But he remained steadfast that inflation would be transitory, attributing much of today's price pressures to temporary supply bottlenecks. Powell also sa