After blistering hot returns in October, market gains continued for the first half of November, although volatility continued to remain a factor.
The Federal Reserve (the Fed) concluded its most recent meeting on November 2nd. As anticipated, they raised interest rates by 0.75%. This move was widely anticipated and initial comments by Fed hinted at a possible moderating of future interest rate increases. In part, their statement read, “… [we will] take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial deveopments.”1 This mere hint of a change in interest rate policy sent the markets soaring.
However, Fed Chairman, Jerome Powell, was interviewed shortly afterward and he clarified the Fed stance: “We still have some ways to go, and incoming data since our last tax return suggests the ultimate level of interest rates will be higher than previously expected.”2 The suggestion that rates may go even higher than previously expected caused markets to reverse course and end the day with significant losses.
Friday, November 4th saw the release of a mixed jobs report. Economists expected 205,000 new jobs to be filled, while the actual number came in at a surprising 261,000. While strong jobs numbers illustrate a resilient economy, they also suggest the Fed’s goal of taming inflation may be further away – and may require additional rate hikes. However, unemployment numbers also surprised: economists expected a 3.5% rate, while the actual number rose to 3.7%, showing that the Fed’s policies may be working after all. The indication that jobs may be cooling, but the economy is not collapsing pushed markets higher.
We continue to be in this strange period where mixed economic data is good news to the markets. Keith Lerner, chief market strategist at Truist Advisory Services summarized it this way, “In an ironic way, a mixed report is probably good for the market because it shows the economy’s not falling off a cliff.”3
Last week the markets’ attention turned from interest rates to the election. Generally, the conclusion of an election provides clarity on the upcoming political agenda and markets move higher. However, November 9th, the day after the midterms, failed to provide that direction. The predicted “red wave” of Republican candidate wins failed to materialize (the markets had predicted a Republican victory, which they believed could serve to block future tax and spending plans.) Dennis DeBusschere of 22V Research spoke to the likely impact of the tight races, “Election results are still uncertain, but the Red Wave that models, investors, and the betting markets anticipated did not materialize, and near term, that will add to already elevated volatility.”
Mr. DeBusschere was correct; election uncertainty, coupled with anticipation of a high inflation reading for October, drove market losses. “Inflation is Enemy Number One for the Fed, and if you see core CPI print creep up, I believe the market would have a negative reaction to that,” said Johan Grahn with Alliance Investment Management. The day ended with the Dow and S&P 500 down 2% and the NASDAQ 2.5% lower.
Surprisingly, the October inflation reading came in lower than expected … and markets rejoiced. While economists expected a year-over-year inflation rate of 7.9%, the actual number came in at 7.7%. By the end of the day the Down had grown by 3.7%, the S&P 500 was up 5.54% and the NASDAQ had risen by 7.35%. Markets continued to rise for the remainder of the first half of the month.
Reviewing returns for the first half of November, all major markets posted solid gains. As of November 15th, the Dow rose by 860 points (2.63%), the S&P 500 gained 120 points (3.09%) and the NASDAQ grew by 370 points (3.37%).
1, 2 www.cnbc.com “Dow closes 500 points loser, NASDAQ sheds 3% as fed chair Powell signals intent to continue hiking rates” November 3, 2022
3 www.cnbc.com, “Stocks rise slightly Friday, but head for a big weekly loss on higher rate fears” November 4, 2022
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