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As markets rally, nothing changes sentiment like price

Risk markets everywhere are rising, and the S&P 500 returned to all-time highs. So, what’s driving this week’s activity?

Our Top Market Takeaways for October 22, 2021.


Markets in a minute
5 observations on the market rally

Nothing changes sentiment like price. Just a few weeks ago we outlined the bear case that investors were flirting with. How times have changed. Heading into the weekend, the S&P 500 is back to all-time highs, and risk markets everywhere are climbing. U.S. banks, home improvement warehouses, next-generation automakers, and digital entertainment companies are making all-time highs. So is Bitcoin. Even Chinese tech stocks, perhaps the worst assets in the world to own this year, are up 20% from their lows earlier this month. Sovereign bonds are selling off, and implied volatility is at pandemic-era lows.   

So what is going on? Let’s try to piece it together with some observations from the past week.

1. Earnings season is off to a strong start. 

Heading into Friday, 109 S&P 500 companies had reported earnings for the third quarter. 75 have surprised to the upside on sales and 89 have surprised on earnings. Coming into the season, analysts expected earnings for the third quarter to be lower than last quarter…but at the current rate, earnings will actually be 4% higher. Wondering about all those supply chain issues and labor shortages? They exist, but haven’t hindered business. Banks, for example, don’t have the same physical constraints as the goods industry and almost all of them exceeded expectations. Some companies like Nike and FedEx were punished for supply chain issues and labor shortages, but others like J.B. Hunt, Union Pacific, and Tesla showed that pricing power and flexibility help manage through disruptions. Overall, the early trends have been encouraging. Earnings growth has powered the entirety of the 20% gain in the S&P 500 this year, and we expect that to continue into 2022.

2. Well, we’re waiting.

Even though some companies have been managing through supply chain chaos, it is still on everyone’s mind. Bloomberg’s Transcript Analyzer shows that S&P 500 company executives have uttered the words “supply chain” about 3,000 times so far this year (which is a record, for those of you keeping score). The question is for how much longer we’ll have to deal with the bottlenecks. While these should gradually improve over the next few months, we aren’t going to hold our breath. A typhoon in Asia has backed up ports in the region, and many of those ships will be headed to log-jammed U.S. ports once they set sail. It probably makes sense to do your holiday shopping early this year….

3. Re-fi-ing De-Fi. 

The first U.S. listed Bitcoin-linked ETF is now the most successful launch in exchange-traded fund history. The ETF gained over 1 billion of assets in just two days, beating the largest Gold ETF’s 18-year-old record. The ETF also saw volumes over $1 billion for each of its first three trading days, more than stalwarts like the silver ETF, the Dow Jones ETF or the ARK Innovation ETF. Perhaps unsurprisingly, Bitcoin rallied to all-time highs.

4. [Some] central banks are getting antsy. 

Not all central banks are like the Federal Reserve. The Bank of England is the most notable central bank to signal that a rate-hiking cycle might be imminent. At a conference on Monday, Governor Bailey said that “We, at the Bank of England, have signaled, and this is another such signal, that we will have to act” to fight inflation and to keep inflation expectations anchored. That is not exactly subtle, and a far cry from Jerome Powell and Christine Lagarde’s much more balanced and patient tone. Short-term rates in the United Kingdom were already soaring, and Bailey is only adding fuel to the fire.

Notably, futures markets are starting to sense a “policy error.” They suggest short rates in the UK will be lower in two years than they are in one year. That means that the Bank of England might cause a growth slowdown that they could try to reverse through interest rate cuts. You don’t have to be a central bank wonk to know that it’s bad news if the market is already pricing cuts before you have even hiked. Bailey admitted that central banks cannot fix supply chain bottlenecks with their tools, but he is so concerned with inflation he is willing to risk a growth slowdown to combat it. We still believe the Fed will remain patient, but if we did see pricing like this in the U.S. yield curve, it would likely lead to turbulence for risk assets.

5. Crunch time in Washington. 

Democratic lawmakers are busy hammering out the details of President Biden’s economic agenda. While there still might be a long way to go to a final bill, there have been some perceived shifts that are a positive for markets. Based on recent press reports, markets now think materially higher corporate tax rates are all but off the table. According to predictit.org, there is now just a 10% chance that the corporate tax rate will be raised to above 24.5%, down from an almost 50-50 chance earlier this week. In fact, that market suggests an 80% chance that corporate taxes don’t change at all. Interestingly, the perception around the amount of spending hasn’t changed. There is still a long way to go, and there is a chance that other tax provisions (like changes to global intangible income taxes) are more onerous to split the difference, but the buzz from Washington this week was a positive for markets.


All market and economic data as of October 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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