October 2021 Stock Market Commentary

Global equities rallied in October as investor sentiment improved, while concerns over the Delta variant and China Evergrande’s debt problem faded. The S&P 500, a benchmark for large cap US stocks, rallied +7% on the month for a +24% return through the end of October.

Smaller company stocks gained +4% in October, with the Russell 2000 index up +17% in 2021. Overseas equities continue to lag their domestic counterparts, with the MSCI ACWI ex-US Index up just +2% for the month and +8% year-to-date. Fixed income markets were flat in October as investors look toward an expected tapering announcement from the Fed at their November meeting. The Barclays Aggregate Bond index is down -1.6% YTD, with the ten-year Treasury yield hovering around 1.5%. Gold prices rebounded +1.5% on the month for a -6% return so far this year.

We saw no changes in any of our proprietary “Three Dials” readings during the month of October, each of which are summarized below:

1. Market Sentiment and Momentum: Positive

After hitting a calendar-year low in September, bullish sentiment rebounded back toward historical averages in October according to AAII survey data, sending equity indexes to new heights and recovering key technical support levels. Our Momentum Dial remains in a “Positive” position heading the seasonally strong months of November and December.

2. Economic Fundamentals: Positive

Despite the deceleration in US GDP growth to 2% during Q3, economists expect growth to improve in Q4 back toward the +6% range we saw in the first half of the year. With inflationary pressures continuing to mount, the Fed has the delicate task of keeping prices in check without choking off future economic growth. On balance, our Fundamental Dial remains in a “Positive” position based on the current pro-growth landscape.

3. Valuation: Negative 

While Q3 earnings in the US have come in remarkably strong so far, elevated price-to-earnings ratios indicate that stocks are “priced to perfection”, leaving little to no margin for error. With equities near historically high multiples, our Valuation Dial continues to show a “Negative” reading.

Our Three Dials composite reading takes a “Cautiously Optimistic” view into the final two months of the year, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.

Sources: Morningstar , AAII, Treasury.gov, LPL Research, Atlanta Fed, St. Louis Fed, Factset