The Relentless Rally

All three of the major US equity indices finished the month of October at all-time highs, capping off the strongest month of returns in over a year, per the S&P 500 Index. The rally comes on the heels of the sharp, albeit brief return of volatility in September. 

In fixed income, domestic interest rates rose during the month with the yield on the benchmark US 10-Year Treasury Note finishing the month above the psychologically significant 1.50% mark.

Our Perspective

Driving the market’s abrupt snap back has been another knock the cover off the ball earnings season.

As of Friday, just over half of S&P 500 companies have reported earnings. Of those that have reported, 82% and 75% have reported positive earnings and positive revenue surprises, respectively. The current third quarter blended earnings growth rate is an enormous 37% year-over-year.

The economy remains healthy, however, we believe these numbers better describe where the economy was, and not where it is likely to be heading from here.

Our long-term outlook for growth remains challenged. Corporate debt levels are historically high, and while the consumer is relatively healthy all things considered, government borrowing remains elevated across the globe. Meanwhile, the demographic profiles of the major developed market economies are mixed at best. Aging demographics are reducing workforce growth, and economic growth in the process.

We believe today’s accelerated rate of economic growth is unsustainable, having been in part fueled by massive fiscal and monetary stimulus programs across the globe that are now beginning to recede. We expect the next step for global economic growth is more likely to be lower than higher from here.

Cruising Through the Economic Cycle

US third-quarter gross domestic product (GDP) slowed to a seasonally-adjusted annualized rate of 2%, per estimates by the US Commerce Department. The weakness was caused by a confluence of factors, including the surge in the COVID-19 Delta variant, as well as ongoing supply chain issues.

Our Perspective

We believe the US economy is rapidly moving through its economic cycle, at a pace with which we have not seen in decades. Our view is that the economy is now mid-cycle, with some indicators even suggesting, remarkably, that it could be in a later stage phase.

For example, supply chain constraints remain prevalent everywhere, and despite the best efforts of our logistics networks, consumer demand remains so robust that they have not alleviated. Commodity prices are rising, further highlighting the strength of energy demand and consumption (e.g., the bounce back in travel). And in the labor market, the US unemployment rate has fallen below 5%, something that did not happen for nearly seven years, or until 2016, during the last economic cycle. Even more pertinently, inflation has notably heated up, as clear an indication as any that supply is outstripping demand.

While these are all characteristics of an economy that is doing well, they also highlight that risks are beginning to build. As the economy moves further through the cycle, toward a more typical later cycle phase, risks begin to build in the system and increasing caution becomes appropriate. We are not quite there yet but are watching closely as this unprecedented economic cycle continues to evolve.

For more, read our recent blog post, Cruising Through the Economic Cycle.

Our View
Economic Cycle		Growth remains robust, and we believe the economy has moved into a mid-phase of the cycle; many countries are now lapping their massive fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has picked back up; equities are around all-time highs, although they remain strongly higher year-to-date; valuations are still elevated and there are a variety of rising risks that warrant monitoring
Bond Market		Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: although the Delta variant has caused regional flare-ups, we still believe the worst of the crisis is behind us from an economic perspective, particularly within the US
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		China Credit Cycle: China is furthest along in its economic cycle; policy tightening may act as a headwind to growth; Evergrande is a major issue
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks are sparking some transitory inflation issues near-term

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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*Sources: Refinitiv, Factset, US Treasury, Federal Reserve, US Commerce Dept.

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