Market Strategy 11/07/2022
Want to Take You Higher
Fed chair’s tone exiting last week’s FOMC meeting curbed enthusiasm for a pivot near term.
Key Takeaways
- With 86% of the S&P500’s companies having reported Q3 results, earnings are up 3.2% on the back of 11.7% revenue growth.
- Of the 11 sectors, three have reported double-digit earnings growth, one has reported triple-digit earnings growth, and five have reported negative earnings growth.
- All 11 sectors have reported positive revenue growth thus far this season.
- Mid-term elections on Tuesday and the CPI report on Thursday will be key factors for investors to consider this week. y.
Jerome Powell’s comments and responses to questions in the press conference that followed the Federal Reserve’s FOMC rate decision last Wednesday made it pretty clear that stickier than expected inflation will likely dictate the need for more rate hikes to curb current high levels of inflation.
Six rate increases into the current Fed rate hike cycle with more likely to follow along with Treasury yields that ticked higher in the week moved sentiment toward stocks lower among some investors and peaked their interest (pun intended) toward fixed income investments if most likely towards the short end of the yield curve. After a hard scrabble September the S&P 500 rallied some 8.8% from that month’s end through October 28 to then shed some of those gains last week, but not all. As of last Friday’s close the S&P 500 remained 5.16% higher from the end of September.
The good news last week was that while key stateside equity indices suffered volatility and lost ground as job growth and hourly wages proved resilient, other data crossing the channel showed signs that the Fed’s efforts thus far have begun to help slow the pace of activity in the economy including manufacturing and home sales. A bump up in the unemployment rate also signaled that the Fed’s actions where having effect to cool factors that feed inflation.
The overall effect of last week’s data trove was a reminder to market participants that chances are this rate hike cycle will be something they’ll have to live with and work with for longer than many had expected. This came as no surprise to us.
In our view the Federal Reserve remains committed to putting current high levels of inflation in check. To that end we would expect the Fed could likely continue to raise its benchmark rate into the second quarter of next year though likely with less aggressive brush strokes. A softer, gentler approach will depend on how effective its efforts prove in curbing inflation in the months ahead.
Among this week’s key data scheduled for release that will likely capture investors’ and traders’ attention are the Consumer Price Index and Core CPI on Thursday. According to a forecast of economists surveyed by Bloomberg News, the CPI report for October to be released on Thursday is expected to have risen 7.9% from a year ago suggesting just some slowing from a level of 8.2% recorded in September. The core CPI (ex food and energy) based on that same survey is expected to ease to a 6.5% level down from a gain of 6.6% in September.
Mid-Term Elections on Tuesday
Before the CPI of course are the stateside mid-term elections on Tuesday which will determine which party controls the House of Representatives and the Senate.
Market history suggests to us that regardless of which party is considered the victor in the mid-term elections a rally of some kind is likely in the equity markets near term. A multiplicity of other factors including monetary policy, economic growth, corporate earnings and revenue growth as well cyclical (current) and secular (longer term) trends are likely to drive market performance to a larger degree into the New Year.
Don’t forget to vote.
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