Early this month, we suggested that economic data in the fourth quarter would likely increase compared to the third quarter. A major contributor to that viewpoint was the expectation that services data would improve. Last week, the Markit Flash PMI report provided the first piece of evidence that this is occurring.
In the IHS Markit Flash U.S. Composite PMI™ report last week, the Services component increased 3.5 points month over month to a three-month high of 58.2. In the report, respondents noted the quickest rise in inflows of new work since July, firms were struggling to meet rising demand, and the rate of backlog accumulation was the most marked in 12 years of data collection. Much of the increase is being attributed to a decline in COVID-19 cases in the United States.
Source: WHO.
With this improvement in services related data, we expect performance of in-person/travel/leisure companies to likely improve. Rising commodity costs and labor pressures have impacted the equity performance of some of these industries like restaurants, airlines, and cruise lines. Hotel and vacation company (Airbnb) stocks have slowed recently but have been outperforming over the last few months.
Source: Koyfin.
While some of the reopening related stocks have been lagging, there is evidence that the market signals are suggesting the rate of change in economic growth will likely accelerate in the fourth quarter.
Cyclical industries like energy, consumer discretionary, and financials are outperforming along with high beta and momentum factors.
Source: Koyfin.
Equity volatility continues to decline, and recently small cap and NASDAQ volatility have declined to the lowest levels since before March 2020.
Source: Koyfin.
The CRB commodity index is at the highest level since late 2014, and oil volatility continues to remain below 40.
Source: Koyfin.
High yield OAS has declined back to the cycle lows after briefly widening in July and August.
Source: Koyfin.
The $US (DXY) is still near the highest level since September and October of 2020, but most of the recent increase is being driven by weakness in the Euro and the Yen. More cyclical and commodity-based currencies have been increasing against the $US.
Source: Koyfin.
There are some idiosyncratic issues that have impacted the equity performance of certain services-oriented companies, but the services related economic data will likely continue to improve, which is being reflected across the various market signals we track.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC