Monthly Review - October 2022
October proved to be another “interesting” month. From an arguably “oversold” position at the end of September, markets rallied strongly at the start of October with the S&P 500 rising 4.4% over the first 4 days of the month. It then gave back those gains before bottoming on the 12th October. Over the next few days economic data was released which suggested, to us at least, that inflationary pressures were not sufficiently contained to give the Fed any reason to ease up on their hawkish positioning. Yet, for reasons we can still not rationally understand, the market rallied 8.2% between the 12th October and month-end. What makes this rally all the more extraordinary is that the equity market strength came in the face of renewed US Treasury market weakness. Over the month of October 10 Year US Treasury yields rose from 3.82% to 4.05% (having touched 4.25% on the way) and 2 Year US Treasury yields rose from 4.28% to 4.48% (having touched 4.6% on the way). The most rational explanation for this divergence between two major asset classes would seem to be that equity investors (imbued with an excess of optimism) are finding it hard to accept the new reality that central banks no longer “have their backs”. In other words, fighting inflation is a higher priority for central banks at the moment than propping up inflated asset prices. That said this bullish outlook for equities was generally reflected globally, although in the UK and EU this was accompanied by either flat or lower government bond yields.
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