Equity investors had reasons to be pleased in October. Most broad categories of stocks generated returns and offset the losses from September. Specifically, the total return for U.S. large-cap stocks was 7.0%, U.S. small-cap stocks 4.3%, developed-international stocks 3.5%, with emerging-market stocks trailing at 1.0%. U.S. stock returns were sufficient to push the U.S. broad market just past its recent all-time high. The bond market was less eventful; bond income offset the effect of slightly higher interest rates, leaving bonds flat for the month.
While assigning reasons to short-term stock market movements is a consistently unproductive exercise, one potential source of optimism in October has been corporate profits. While only about one third of large U.S. companies have reported their third quarter results so far, around 80% of those firms have beaten their expected earnings and/or revenue. Additionally, for the period ending September 30th, the forecasted yearover- year earnings growth rate is above 30%. These promising results are broad-based and not caused by a few outlier sectors with stellar performance. In fact, all 11 sector classifications are reporting year-over-year growth in both sales and profits.
With such promising quarterly U.S. corporate results, we await a commensurate improvement in the overall U.S. economy. So far, that hasn’t happened. The October advanced release of Q3 2021 GDP growth confirmed the earlier expectation that economic growth slowed during the third quarter. (Real GDP grew at an annualized rate of 2%.) This slowdown from the rapid growth seen in the first and second quarters (+6.3% and +6.7%, respectively) was largely attributed to a resurgence in the COVID-19 Delta variant over the summer. The resurgence clearly put pressure on travel, dining, and retail spending.
Still, other economic data continues to be robust. Business surveys of domestic services and manufacturing firms show that both remain in a solid expansionary mode, and the unemployment rate fell below 5% for the first time since the pandemic began. Weekly jobless claims numbers also continue their favorable decline as the recovery progresses. As the Delta variant surge moderates, forecasts for Q4 economic growth are in the 6% range, and full 2022 GDP growth is expected to be above 4%. At that point, most economists believe the economic recovery will be complete, and further growth will decelerate to its pre-pandemic trend of about 2% per year.
As we move into November, we will be giving special focus to Required Minimum Distributions (RMDs), Qualified Charitable Distributions (QCDs), year-end capital gain distributions, and tax-loss harvesting in our clients’ portfolios. While the strong market has left few losses to harvest this year, there is much work to be done on the other fronts and we will be tracking all of it.