Knowledge Hub

October Market Update

Luke Sheather
Luke Sheather
Posted 08.11.2021 in Investment Planning

Key Takeaways

  • US shares outperformed other regions despite higher inflation and supply chain problems.
  • Speculation continues on the timing of our first interest rate hike. 
  • What do higher interest rates mean for sharemarkets?
Global share markets had mixed results in October. Developed regions such as the US and Europe performed strongly, while Australia and parts of Asia were relatively flat.

It was quite a turbulent month for bond markets, as yields spiked in Australia following stronger than expected inflation data. However, globally, yield movements were somewhat steadier, which led to only minor losses for the month.

Earnings update provides upside

We’re just over halfway through earnings season in the US, and once again, profits have surprised on the upside. Of the companies that have reported so far, 82% have exceeded market expectations, which is a key reason we saw the US outperform other share markets last month. Financials have been the best performing sector so far, beating market expectations by some 20% as they unwind their bad debt provisions following the pandemic.

What is perhaps most encouraging about these strong earnings results is that they are occurring despite higher inflation and supply chain problems, which suggests that companies have been able to pass on the higher input costs to their customers with little effect on underlying demand.

Inflation and rate hikes speculation

Interest rate fears weighed down on the Australian share market last month following higher than expected inflation data for the September period. Indeed, it was the first time that core inflation has been within the RBA’s target range in six years.

Most of the factors driving prices higher have been related to COVID disruptions and temporary distortions between supply and demand, particularly for raw materials and energy in more recent times.

As a result of the higher inflation readings, several economists have now brought forward their expectations of when we might see that first interest rate hike, with some now tipping as early as this time next year. However, the RBA held firm on its stance following its November meeting, reiterating that a tighter labour market and stronger wage growth were required before any rate hike was considered. Conditions that are not expected to occur any time soon. Nonetheless, all eyes will be on Australia’s employment and wage growth numbers later this month.

Outlook

The normalising of inflation to levels more consistent with central bank targets should be viewed as a positive. Small levels of inflation are generally consistent with economic growth, higher wages and better standards of living. While the prospect of increasing inflation and rising interest rates has typically been negative for share markets, so long as company earnings remain strong and economic growth remains robust, share markets can certainly continue to rise in upcoming periods.

Luke Sheather
Luke Sheather
Luke Sheather
As Capital Partners Investment Specialist, Luke does far more than simply identifying and recommending investments, Luke sees it as his role to help clients contemplate and answer life’s big questions.

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