October Macro Recap

Although volatility remained elevated, markets demonstrated some optimism last week as we make our way through the fourth quarter. Notably the S&P 500 is up now over 4.0% since the beginning of October, which historically tends to be a tough month for market performance. Nonetheless, for markets to mount a sustainable rebound, we would likely need to see certain conditions in place, including moderating inflation and Treasury yields peaking, neither of which are fully confirmed yet – but we may be getting closer.

During October, it was reported that inflation rose 0.4% during September while core inflation was up 6.6% from a year ago, the biggest 12-month gain since August 1982. Given these inflation figures, markets now expect the Fed to increase 0.75% percentage point rate hikes in November and December for a year end target of 4.4%-4.6%.

At the end of September and early October, there was also mounting evidence that investor sentiment had become very low, and markets were perhaps oversold. This showed up in surveys like the AAII bull-bear sentiment indicator, which reached the most pessimistic sentiment since 2008. In addition, the monthly Bank of America Fund Managers survey indicated that investors were holding the most cash since 2001. This extreme pessimism tends to be a contrarian indicator for markets and can set up markets for an oversold bounce, which is perhaps some of what we have seen these past weeks. Nonetheless, while these rebounds may be temporary, they can at times mark capitulation in sentiment and pave the way toward establishing more sustainable rallies.