THE WEEK ON WALL STREET

A strong opening to the third-quarter earnings season sparked a late week, broad-based rally that helped stocks finish the week with solid gains.

The Dow Jones Industrial Average rose 1.58%, while the Standard & Poor’s 500 added 1.82%. The Nasdaq Composite index led, gaining 2.18% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, was up 1.37%.^1,2,3

INVESTOR OPTIMISM RETURNS

After beginning the week on a lackluster note, stocks turned higher on Wednesday as companies kicked off a new earnings season and details about the Fed’s taper plans emerged. Investor enthusiasm shifted into high gear the following day on positive economic data and earnings reports that exceeded investor expectations. Buying continued through Friday on fresh earnings surprises and a better-than-expected retail sales report. 

The economic data allayed some concerns about inflationary pressures and economic deceleration, while early earnings results provided hope that companies had weathered the surge in summer Covid infections. Nevertheless, worries about how supply-chain disruption and higher prices may impact corporate earnings guidance haven’t gone away. 

LET THE TAPERING BEGIN

Minutes from September’s Federal Open Market Committee released last week provided detail around the Fed’s plans to taper its $120 billion monthly bond purchase program. The Fed expects to reduce its purchases by $15 billion each month, beginning in mid-November/December and ending in June 2022.⁴

This tapering schedule is somewhat faster than what investors were anticipating, reflecting the Fed’s concern that inflation has been somewhat higher and more persistent than it had anticipated, with continuing supply-chain bottlenecks raising that risk level.  Fed Chair Powell’s commitment to transparency and advanced signaling of policy changes appeared to have worked, as markets greeted the news calmly. In fact, stocks rallied strongly the following day as yields moved lower.