RECAPPING LAST WEEK
U.S. equity markets overall continued to rise, with both the S&P 500 and Nasdaq notching fresh
all–time highs. The beleaguered Russell small cap index, however, continued to underperform.
European markets were down modestly while Asian markets advanced. Treasury yields surged to
fresh highs on Wednesday before cooling by the week’s end as rates and borrowing costs
remained a major focus. On Friday, the Energy Information Administration reported that Hurricane
Isaias, at that point rated a Category 3 storm, was impacting offshore crude oil and natural gas
production in the U.S. Gulf Coast region. The U.S. Martine Minerals Administration estimated
about 63% of the daily oil production and around 57% of natural gas production has been shut in,
based on offshore operator reports from Thursday at mid–day. These events were projected to
have a negligible (2 to three cent) impact on gasoline and diesel prices, but that is overshadowed
by events happening in the Middle East and Russia impacting the oil market. Expensive energy,
elevated yields, and geopolitical uncertainty have made markets more susceptible to negative
surprises and have resulted in a more cautious stance by investors, reflected in broad equity fund
outflows, weakening participation in the equity rally, and a shift toward bond and money–market
funds. Bond fund inflows, meanwhile, were at record levels throughout the week. Risk appetite
shows a more selective positioning, with inflows into technology, utilities, and industrials despite
the broader equity fund outflow. OpenAI’s diminished annualized revenue projections reflected
greater scrutiny of ballooning financing needs and costs relative to potential AI future returns.
Bitcoin and gold were down most of the week, rebounding Friday. Federal Reserve minutes
released Wednesday reinforced the higher–for–longer message regarding interest rates. Committee
members see a resilient economy alongside stubborn inflation, and most expect additional
tightening as needed. While the minutes didn’t telegraph an urgent series of rate hikes, they
provided little reason to expect near–term policy relief. The future forecasted volatility of bonds
has lurched higher over the past several weeks. The MOVE index uses an options–pricing model
based on a weighted average of option probabilities to show collective expectations for future
volatility in the fixed income market. It’s interpreted as a “VIX for bonds”, so it’s notable that its
own divergence from the very low S&P 500 VIX levels is the largest it’s been since the turmoil last
year surrounding Liberation Day. Additional economic reports such as the ISM Services PMI, while
below forecast and last month’s reading are still showing expansion. Consumer confidence
deteriorated, by 3.7% for the month, and the Current Economic Conditions Index tumbled by
12.2% month–on–month and is down 23.7% compared to October 2025.
THE WEEK AHEAD
Look for the market to focus on credit–market stability and earnings quality. Market participation
and money flows will be influenced primarily by Wednesday’s September CPI release, as well as
major bank earnings reports—all of this will impact interest rate concerns. U.S. stock markets are
open for Monday’s Columbus Day holiday, but bond markets will be closed. Bank earnings kick off
Tuesday with a slew of key quarterly reports from JPMorgan (JPM), Goldman Sachs (GS), Wells
Fargo (WFC) and Citigroup (C). Analysts will be busy parsing credit quality, loan growth, trading
revenues, deposit costs, and the all–important read–through on consumer health. The follow up PPI
this Thursday will offer additional context for Wednesday’s CPI reading—should CPI ease, oil
remain below recent highs, and Treasury yields retreat, we may see a more positive tone. More
bullish participation of small caps would further cement a broad–based rally, as would continuing
containment of high yield spreads alongside strength in crypto and a weakening U.S. dollar.
(Schwab)
