United States

Markets Unphased by October Frights


Key Observations
  • Equity markets rebounded in October to new all-time highs, while U.S. Treasury yields trended higher, which led to modest declines across most fixed income asset classes.
  • U.S. and global central banks took initial steps toward tightening monetary policy. (For historical perspective, markets produced positive returns when the Federal Reserve last shrank its balance sheet from 2015 through 2019.)

Market Recap

The market volatility that emerged late in the third quarter quickly abated in October. After U.S. large-cap stocks declined in September (the first monthly decline in seven months and the first drawdown of more than 5% for the year), the S&P 500 advanced 7.0% in October, supported by resilient corporate fundamentals. Overcoming supply chain bottlenecks and inflationary pressures, 84% of S&P 500 companies have beaten earnings expectations1 thus far in the reporting period—a near-record high—with profits advancing 32% year over year2. The rotation into value stocks that took place in late September was short-lived, with the Russell 1000 Growth Index (8.7%) outgaining the Russell 1000 Value Index (5.1%). Small-cap stocks (Russell 2000 Index) returned 4.3% but have now trailed the return of large-cap stocks in seven of the last eight months. International markets (MSCI ACWI ex-U.S. Index) returned 2.4%, as investors weighed diminishing concerns surrounding the potential default of Chinese property developer Evergrande, along with the impact of energy shortages, particularly in China and the United Kingdom.

Returns were modestly lower across most fixed income asset classes for the month. Persistent inflationary pressures stemming from supply chain constraints and expectations for less accommodative monetary policy pressured the U.S. 10-year Treasury yield to continue the ascent that began from its intra-year low of 1.19% on August 4th, finishing the month at 1.55%3. Meanwhile, the yield of two-year Treasuries has doubled since mid-September to 0.48%4, reflecting a rising probability of an initial rate hike in 2022. U.S. investment-grade bonds (Bloomberg U.S. Aggregate Bond Index) were nearly unchanged as the spreads of the highest-rated segments of corporate credit fell to levels below their pre-crisis lows5, offsetting the impact of higher Treasury yields. Five-year inflation expectations rose to their highest level since 20066, leading Treasury Inflation-Protected Securities (Bloomberg US Treasury US TIPS TR) to advance 1.1%.

A Policy Transition

A pivot away from emergency levels of fiscal and monetary stimulus has begun in recent months7. In September, Federal Reserve (Fed) Chairman Jerome Powell indicated the central bank is likely to begin tapering its asset purchase program in November, and now nine of 18 FOMC members expect a rate hike will come in 2022.

Policymakers outside the U.S. have been more aggressive in their response to rising inflation. Central banks in South Korea, Australia, Brazil, Russia, Mexico and Norway8 recently moved official rates up from historical lows. Meanwhile, the Bank of England indicated it could raise rates by year end, and the European Central Bank will likely announce the retirement of its Pandemic Emergency Purchase Program next March.

S and P 500 Advances Amidst Tapering

Of note, equity markets displayed resilience throughout the last cycle of monetary policy tightening. The Fed reduced its balance sheet from a peak of $4.5 trillion in October 2014 to $3.8 trillion in August 20199, while raising the federal funds target rate from a range of 0.00% to 0.25% in late 2015 to a range of 2.25% to 2.50% through early 201910. Investors who remained invested through an initial spike in volatility in the early stages of policy normalization were rewarded with an average calendar year return for the S&P 500 of 12.5% from 2015 through 201911.

Market Outlook

Markets continue to weigh solid economic activity and corporate earnings against the potential impacts of inflationary pressures and a transition to less accommodative monetary and fiscal policies. Domestic equities have ascended with historically low volatility to all-time highs after S&P 500 earnings expanded 94.2% year over year in the second quarter12. Yet, sentiment based on a somewhat evolving macro-economic outlook has caused abrupt swings in leadership within broader indices.

With the recovery of S&P 500 earnings to above pre-crisis levels and valuations at elevated absolute levels, we expect equity markets will likely trend more in line with earnings growth in coming years with persistent shifts in style leadership possible as investors grapple with the transition to more normal levels of economic activity and monetary policy. To this end, we recommend investors maintain a portfolio anchored by reasonable long-term return expectations, with diversification across assets that may benefit from a variety of macro-economic conditions.


  1. “Expecting the Exceptional,” Northern Trust, October 22, 2021
  2. “Strong Earnings Propel Market Higher,” MFS, October 22, 2021
  3. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DGS10
  4. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DGS2
  5. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/AAA10Y
  6. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/T5YIE
  7. “Contribution of Fiscal Policy to Real GDP Growth,” Brookings Institute – Hutchins Center of Fiscal Impact, https://www.brookings.edu/interactives/hutchins-center-fiscal-impact-measure/
  8. “Central Policy Rates,” BIS, https://www.bis.org/statistics/cbpol.htm
  9. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/WALCL
  10. Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/DGS2
  11. FactSet
  12. “U.S. Equity Market Attributes,” S&P, September 2021, https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/

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