In U.S. politics, an “October surprise” is a news event that disrupts the dynamics of a forthcoming November election. This month, the financial markets have been disrupted by the surprise outbreak of war.

I recently heard a TV pundit call the Israel-Hamas war an “unexpected black swan.” I got annoyed, because nobody “expects” a black swan event. By definition, a black swan is unforeseen.

I thought of the famous Monty Python sketch, in which Torquemada (as played by Michael Palin) bursts into a room and yells: “NOBODY expects the Spanish Inquisition!”

Nobody expected the Israel-Hamas war. The world is now grappling with the horrific consequences of simultaneous wars in the Middle East and Eastern Europe. Previous investment assumptions about the fourth quarter and beyond have been upended.

Below is a re-cap of the previous week in the global financial markets, and what to watch out for in the days ahead.

WATCH THIS VIDEO: Navigating Treacherous Financial Waters

Despite the propaganda you may be hearing on certain partisan news outlets, global inflation is largely the result of geopolitical dislocations, not fiscal policies. Throughout human history, the most extreme changes to society have been wrought by pandemics, wars and natural disasters. (Modern climate change is a discussion for another day.)

Elevated inflation has been pushing up interest rates and bond yields, in turn clobbering stocks. This trend was held in abeyance during the summer as inflation and bond yields stabilized, helping stocks to rally. But inflation and interest rate fears have returned this fall with a vengeance, threatening to derail the economic recovery.

The S&P 500 index (SPX) last week fell for four straight days to close Friday below its 200-day moving average, wiping out all previous gains made so far in October.

At market close October 20, the SPX sat below both its 50- and 200-day moving averages. Also by the end of the week, the benchmark 10-year U.S. Treasury yield was flirting with 5.0% and the CBOE Volatility Index (VIX) had surpassed 21.

These three bearish technical readings suggest further volatility and equity declines ahead.

To be sure, inflation has been markedly cooling this year, but still not fast enough to suit the hyper-vigilant Fed. In an October 19 speech, Federal Reserve Chair Jerome Powell uttered hawkish intimations that sent stocks reeling.

Spain’s 15th century Grand Inquisitor Tomas de Torquemada tortured heretics. Powell is torturing investors. Perhaps Powell should talk less and let policy speak for itself.

As you can see from the following table, U.S. and international stocks finished last week in negative territory, with the interest rate sensitive tech stocks in the NASDAQ bearing the brunt of the punishment:

Wall Street is betting that the Fed won’t hike rates at its next meeting October 31-November 1, but investors are less sure what happens afterwards. Another hike could be in the cards at the Fed’s December meeting.

Rising oil prices, mostly caused by the two wars and OPEC+ production curbs, are adding to inflationary pressures. Cartel leaders Saudi Arabia and Russia are intent on maximizing revenue, but also on punishing the West for what they perceive as hypocrisy on human rights.

Gold prices continued their ascent last week, rising nearly $14 to settle at about $1,994 per ounce. The yellow metal is a classic hedge against inflation and crisis. As such, gold belongs in the hedges sleeve of any portfolio.

Monday, Monday…

The slump extended into the new week. The main U.S. stock market indices closed mostly lower on Monday as follows:

• DJIA: -0.58%
• S&P 500: -0.17%
• NASDAQ: +0.27%
• Russell 2000: -0.89%

Big Tech stocks were generally higher, ahead of quarterly earnings releases that are expected to be solid. The sector laggards were energy, utilities, and materials. Bond yields eased a bit, with investors hopeful that they’ve peaked.

Bond yields follow the path of the federal funds rate over time. Higher yields boost the cost of borrowing, weigh on equity valuations, and pressure bond price returns. Global central banks have been raising rates as well.

And yet, despite geopolitical turmoil and central bank tightening, corporate earnings and the economy are holding firm. Profits and economic growth remain on solid ground, two positive fundamental factors that are helping prevent a more serious stock market decline.

According to research firm FactSet, third-quarter corporate earnings growth for the S&P 500 is currently projected (as of October 20) to come in at -0.3%, but improve over time.

Analysts expect year-over-year earnings growth of 6.7% for Q4 2023. For calendar year (CY) 2023, analysts predict year-over-year earnings growth of 0.7%. For CY 2024, analysts are calling for growth of 12.2%.

Even with China’s recent stumbles, the International Monetary Fund, in its latest report published October 23, projects that global economic growth will come in at 3% in both 2023 and 2024.

The week ahead…

The following economic reports are scheduled for release in the coming days and warrant close scrutiny:

S&P Case-Shiller home price index, S&P flash services and manufacturing PMIs (Tuesday); new home sales (Wednesday); U.S. gross domestic product, initial jobless claims, durable goods orders, pending home sales (Thursday); personal income, personal consumption expenditures price index (PCE), and consumer sentiment (Friday).

If key economic data this week are positive, beaten-down equity investors may seize on the news as reasons to start buying again. The big news will be the PCE reading, which is the Fed’s preferred inflation measurement. If the PCE numbers (for September) come in hotter than expected, the infliction of investment pain is likely to continue.

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John Persinos is the editorial director of Investing Daily.

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