October market update

During October, there were significant but contrasting price movements in the major asset classes. Global equities had a good month, shrugging off some early weakness to finish the period strongly. In contrast, the bond market had a more torrid time, with some sharp price movements at the shorter maturity end of the spectrum pushing most indices into losses for the month as a whole.

“Previous nervousness about how higher input costs and supply chain disruptions could eat into profits quickly faded”

The major force driving the solid equity market moves was a steady stream of good news from the corporate earnings season. Previous nervousness about how higher input costs and supply chain disruptions could eat into profits quickly faded, as company after company demonstrated an ability to pass on these higher costs into higher prices. The corporate sector, especially in the USA, is now back on the growth path it was on before Covid interrupted and this realisation was enough to move most stock markets back to the top of their recent trading ranges.

In stark contrast to the steady, even-paced climb in equities, bond markets had a much more unsettled time in October. Growing investor unease about the relaxed attitude of central banks to widespread inflationary pressures was behind the volatility and, as the month progressed, bond markets increasingly began to challenge the authorities over this issue. As selling mounted, one by one the developed central banks began to give way under pressure. The Canadians were the first to change their stance, closely followed by the Australians, when both scaled back the size of their interventions in their respective bond markets, signalling a tightening in monetary policy. The Governor of the Bank of England also shifted his recent hawkish rhetoric up a notch by stating that he too will ‘’have to act’’ on similar price pressures in the UK. By the end of the month, many bond prices in developed markets had moved faster than they had in decades, pricing in the prospect of interest rates going up earlier than previously thought.

The implications of last month’s bond market volatility are still being thought through as we write. Equities had a good month, rising despite the prospect of interest rate policy tightening imminently and commodity markets were similarly indifferent to the bond market jitters. The simplest interpretation of events is perhaps that the ‘inflation complacency’ shown in shorter dated bond pricing was an outlier view, ignoring the economic data which other asset classes were paying much closer attention to. Rather than a signal that anything unexpected has happened, we think it most likely that the readjustment in October is probably little more than a welcome catch up with reality.

“The transition from pre to post Covid regimes is clearly well advanced, but also not yet complete.”

It also seems clear to us that these recent rapid price movements within major asset classes are signalling a high degree of investor uncertainty about future market direction. The transition from pre to post Covid regimes, is clearly well advanced, but also not yet complete. The lack of certainty around when economies will ‘normalize’ is compelling central banks to maintain a high wire balancing act between not withdrawing help too early, nor letting it stay in place too long either. Whilst this tricky handover period is still underway it seems reasonable to us to expect market skittishness to continue, with many assets meandering within wide trading ranges in the immediate future. It also seems reasonable to us that since we are generally still very early into a strong recovery cycle the underlying trend is still a positive one, favouring a maintenance of the modestly positive stance we have reflected in your portfolios.

Portfolio Performance

Portfolios overall returned between -0.2% and + 2.5% on the month, with the riskier portfolios performing best. Unsurprisingly equity managers were the strongest performers, with those in the USA doing well across the market cap spectrum. Gold staged a modest recovery as did equity growth managers. Given the moves in bond markets, most of the detractors from performance were bond related, impacting the more cautiously invested portfolios.

On behalf of the Saltus Investment Committee, October 2021