Singular Journal - Securities house
Fixed income

Monthly Outlook - November 2022

SUMMARY OF THE MONTH

October represented a respite for the markets, leading the Dow to its best month since 1976, even as earnings disappointed some major companies.
The dollar retreated from its highs as both the euro and sterling regained some ground after months of downtrends.

UK pension funds faced an existential crisis throughout the month. This wreaked havoc in the rates markets, due to the economic plan of former Prime Minister Liz Truss. The damage was so great that Truss was forced to resign after just 45 days and was replaced by former finance minister Rishi Sunak.



MACRO CORNER

October offered investors a relief rally and stocks rose sharply, with the Dow Jones having its best month since 1976. The rise in equity markets came despite a stronger-than-expected CPI print during the second week of the month that caused strong volatility and some of the world's largest companies had much weaker-than-expected earnings.

Despite the rally in stocks, and aside from a few specific sectors, October was plagued by additional signs of economic trouble and cracks in the financial markets. Stocks don't necessarily have to follow the timeline of economic cycles. But they are important for understanding how companies will perform in terms of earnings in the future.

Let's start with the good news:

GDP increased 2.6% during Q3 2022, which was more than expected. However, we saw 10-year Treasury yields rise above 4% over the same period and, more importantly, we are seeing mortgage rates above 7%.

30-year fixed mortgages are now at levels not seen in 2 decades and housing, according to the GDP growth breakdown, fell at an annualized rate of 26%. We are now seeing housing affordability metrics in "unprecedented territory" according to Raymond James analyst Buck Horne. By his calculations, the monthly finance cost for the median home is now 42% of median household gross income, higher than at the 2006 peak. A substantial portion of GDP is driven by housing and any decline filters through the entire economy. While this should reduce prices, it also creates a recessionary environment.

English market

Things in the U.S. seem to be holding up relatively well, but that is not the case in other markets. One of the biggest market-moving events last month was the resignation of yet another British prime minister after just 45 days, as the announced tax cuts roiled markets and sent the pound tumbling. The impact to the pound was so great that UK pension funds, which manage around $$2 trillion, faced substantial margin calls and forced intervention by the Bank of England.

Subscribe to continue reading

Read all content without limits

Subscribe here