Weekly Market Update: October 10, 2022

Alex Ralicki |

The Federal Reserve’s increasingly restrictive monetary policies and resultant higher Treasury market yields have not been good for stocks for the most part. That is because a higher return on risk-freeT-bills reduces the appeal of riskier assets, particularly high-growth stocks.

Higher interest rates are not ideal for the economy either. The increased borrowing costs make it more expensive for businesses to invest in their operations and for consumers to secure a loan. This consequence is a major part of the Fed’s plan to lower the money supply, reduce demand for goods and services, and ultimately stabilize prices.

Some cautious commentary from Corporate America leading into third-quarter earnings season suggests economic difficulty ahead. Technology behemoth Apple recently noted slowing demand and told its suppliers not to increase production of iPhones. This, along with a dour outlook from shipping giant FedEx may indicate consumer demand is slowing ahead of the holiday shopping season. If earnings estimates are ratcheted down this earnings season, it will likely put further pressure on stock valuations. This also makes companies that pay a competitive dividend more desirable investment options in this volatile equity market.

The central bank’s plan to reduce demand is working. Home sales fell during the late summer months, as higher borrowing costs reduced housing affordability. Likewise, manufacturing activity is slowing according to the Institute for Supply Management, a trade group. Its Purchasing Managers’ Index (PMI), a survey of the prevailing direction of economic trends in the manufacturing sector, dropped to 50.9 in September, the lowest reading since May 2020. The survey also noted that companies are adjusting to potential future lower demand.

In conclusion: The month of October has historically been a volatile one for equities, with some of the biggest one-day losses for the major indexes occurring during the 31-day period. With that in mind, we think investors should exercise near-term caution, with attention paid to stocks of high-quality companies that have strong balance sheets and the cash flow to maintain their dividends. 


Source: Valueline.com