October is a month known for market volatility. Yet, we have largely seen rising equity indices, confirming October as historically one of the top performing months of the year.
Market corrections are normal in the overall structure of a major bull market. But it is the energy crisis and inflation story that are grabbing headlines at the moment and this should demand our attention as it may affect our portfolios in various ways going forward.
Interestingly, the sell-off in the broader stock market last month did take longer to recover than previous dips this year. Many commentators were eager to warn of a deeper pullback and cited numerous headwinds facing the bulls.
Both the long-term uptrend and the ultra-reliable 50-day moving average were breached on substantial volume.
A few weeks later, it appears as though retail investors in particular have once again stepped in to buy the dip. The broad S&P 500 is close to recapturing record highs just as the fundamental picture is questioned with earnings revision breadth rolling over.
This is especially noteworthy as consumer confidence surveys around the globe have been falling sharply. Rising costs, as opposed to growing incomes, are worrying the consumer even as retail investors continue to commit more cash to equities aggressively.
Perhaps this is due to demand remaining robust. That means once we can pull through the steep price increases and supply bottlenecks that are evident around the globe, confidence for both businesses and the consumer will improve.
The global energy crisis continues to play out with crude oil rallying to multiyear highs. Over-compliance by Opec+ on output cuts has been helping crude oil supplies to remain tight in the face of increasing global demand.
Bloomberg data shows that the group underproduced about 740,000 barrels per day of crude oil in September compared with the agreed production limit.
Other commodities such as industrial metals have also risen to long-term highs on growing concerns that the global energy crunch might hit production.
Copper climbed above $10,000 a tonne recently, while aluminium traded at levels last recorded during the 2008 financial crisis and zinc surged to 15-year highs. These metals are benefitting from robust demand and supply disruptions due to rapid increases in the prices of coal and gas.
This means that rising prices are feeding into economic data and chiefly inflation figures. The recent headline from the US Consumer Price Index figures showed that the slowdown earlier in the summer reversed last month.
The trend is back on an upwards path with core inflation close to the level it reached in 2000 and shortly before the financial crisis.
China's factory gate prices recently jumped to their highest level in 26 years. Other countries are experiencing similar price pressures across numerous measures.
The nagging question for investors is in some of the market reactions to these higher inflation prints. We would normally assume that growing inflation expectations mean rising interest rates and bond yields.
But recently, real yields – the gap between nominal yields and expected inflation – have turned negative in the US. This signals concerns about growth due to surging energy costs and potentially higher wages further out and is not due to rising demand and activity.
If we have seen the peak in economic growth, the top in earnings growth is not far behind. Although these are both still positive, earnings may struggle to keep beating forecasts as they did in the first and second quarters of this year.
Valuations for equities are still elevated and these do not leave much room for disappointment. The fact that a market that has ridden on a huge US Federal Reserve liquidity wave will be cut short in the coming months also brings volatility concerns.
It pays to be attentive, especially if inflation and supply chain bottlenecks last longer than expected.
Hussein Sayed is the chief market strategist at Exinity Group