Zacks Investment Management

In today’s Steady Investor, we examine the important factors affecting the market and what might lie ahead, including:

• PMI shows signs of economic resilience
• 10-year U.S. treasury bonds reach 5%
• China implements stimulus
• Natural gas surplus expected to reduce heating bills

Purchasing Manager’s Indices Show Further Signs of Economic Resilience – Manufacturing and services PMIs offer a useful glimpse into U.S. economic activity each month. For unfamiliar investors, S&P Global and Institute for Supply Management (ISM) are the two major companies that report PMI data. Their methodologies and reported figures are generally different each month, but both tend to provide the same insights about services and manufacturing activity, i.e., whether we’re seeing expansion or contraction. This week, S&P Global released October PMI data for U.S. manufacturing and services, and both gauges showed that economic activity improved in the month. S&P Global indicated that manufacturing hit 50 in October, while U.S. services PMI reached 50.9 – a three-month high. A high-level takeaway here is that the economy performed better in October than in late summer, confirming again that the U.S. economy is doing better-than-expected. Among the top reasons the U.S. economy is likely performing better than expected: strong hiring continues to fuel strong spending.¹

Tips On How to Survive Market Volatility

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10-Year U.S. Treasury Bonds Reach 5% for First Time 2007 – The big headline this week once again involved the 10-year U.S. Treasury bond, whose yield touched 5% for the first time in 16 years. Interestingly enough, demand for the higher yield put upward pressure on bond prices, which pushed the yield back down below 5% before the end of the trading day. We have written before in this space about better-than-expected economic growth being a driver of higher interest rates, as investors re-price a higher-for-longer rate outcome. Because interest rates determine many borrowing costs, from mortgage rates, credit cards, auto loans, business loans, and other government debt, upward pressure risks slowing economic activity going forward. We don’t dispute this possibility – but as seen on the chart below, even with the strong upward move recently, long-duration interest rates are still below their average in the previous 50+ years. Over that time, the economy has gone through some ups and downs, but they’ve mostly been ups.³

China Implements Stimulus to Bolster Economy, But Is It Enough? China’s economic challenges are well-documented, and range from weak consumer spending, slow growth in exports, and a beleaguered property market. What is less well-documented are the government’s efforts to prop up economic growth, largely because there haven’t been many material stimulus packages put in place. That may be changing. For the first time in more than 10 years, China issued additional sovereign bonds and raised its budget-deficit target in somewhat of an ‘emergency legislative session.’ The government agreed to issue 1 trillion yuan, or $137 billion, in additional sovereign debt, which will provide additional capital to use for stimulus measures – though it is unclear at present what these stimulus measures will be. The government has yet to engage in any type of direct transfer fiscal stimulus and instead has engaged in interest rate cuts, lowering mortgage costs, and other less robust measures. Investors may read the new bond issuance as a signal that the government is growing wary of economic weakness, but also that the mindset about addressing the issues may have changed as well.⁵

Looking Forward to Lower Bills This Winter – Winter weather is coming, which means Americans will spend more time indoors. Fortunately, the bill for heating homes should be lower this year than last, with strong natural gas stockpiles and expectations for a warmer-than-normal winter both keeping downward pressure on natural gas prices. There are about 60 million U.S. households that use natural gas to heat homes, and the Energy Information Administration expects winter bills to be about $600 on average, which would be 21% lower than last year. Higher utility bills crimped household budgets last year and resulted in higher input costs for businesses – which contributed to inflation. Those pressures should abate this winter.⁶

Prepare for Market Downturns – We’ve all witnessed how quickly the stock market can change. That’s why it is important for investors to understand how bear and bull markets work.

To gain insight into market downturns and steps you can take to protect your assets during the next bear market, you’re invited to get our free guide – Everything You Need to Know About Bear Markets.⁷

If you have $500,000 or more to invest, get this helpful guide today. It walks through the history and types of bear markets, how investors typically react to extreme volatility, and what we can learn from the history of bear markets and pandemics.

Disclosure