November 2022 Market Insights
BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
The Fed has been the driving force for both the bond and stock markets. The economy continues to show signs of slowing but inflation may be slowing as well. History favors long-term investors.
Fed signals slowdown:
The Federal Reserve raised short-term interest rates by 0.75% on November 2nd to a range of 3.75% to 4.0%. While the Fed hinted at slowing the pace of hikes and possibly raising by 0.5% at each of the next two meetings (December 14th and February 1st), they also noted the ultimate stopping point will be higher than previously expected. Compared to previous expectations, the Fed may now raise rates at a slower pace for longer, slow down the economy for longer, and be slower to reverse course. While stocks have gained since this announcement in hopes of a pause, the Fed is not indicating they are close to a pause or even a pivot, which would be the lowering of rates.
Stocks prices up:
From mid-October to mid-November, the S&P 500 gained over 10%, including a 5.5% gain on one day. On November 10th, stocks rallied 5.5% after a better-than-expected inflation report. The Consumer Price Index showed inflation growing less quickly than expected and growing less quickly than the prior month. The report for October showed headline year-over-year inflation of 7.7%, compared to the prior month’s 8.2% reading. This led to a sentiment shift about the path of future Fed rate hikes, with market participants hoping that fewer hikes will come to fruition. Other indications of inflation, such as container shipping, used car prices, and even a month-over-month decline in home prices are signs that inflation is slowing.
Bond yields down:
While short-term yields continue to rise due to the Fed, medium and longer-term bond yields have fallen from last month’s peak. A good portion of the move also came on November 10th. In the past month, 5-year Treasury yields reached 4.45% before falling to 3.85% and 10-year Treasury yields reached 4.3% before falling to 3.7%.
Corporate earnings, lowered expectations:
For the third quarter, corporate earnings grew 2.2%, which is the lowest in two years. Expectations for corporate earnings growth has fallen for the next several quarters, with estimates now showing minimal growth or even year-over-year declines.
Recession indicators increasing:
In inverted yield curve, declining housing starts, and a declining index of Leading Economic Indicators (LEI) are a few indicators that have historically preceded a recession, though the timing has not always been immediate. As the Fed has raised short-term rates, an inverted yield curve has resulted, which means that short-term rates are higher than long-term rates. Both the 3-month Treasury yield and the 2-year Treasury yield were recently 0.65% higher than the 10-year yield. This was the most inverted 2yr-10yr level in 40 years and the most inverted 3mo-10yr level in over a decade. Housing starts and building permits are lower month-over-month and year-over-year. The year-over-year LEI reading continues to slide further into negative territory.
Jobs still strong:
Weekly jobless claims have remained historically low, and the October jobs report released on November 4th continued to show strength, with 261k jobs being added in October while September’s report was also revised higher by 52k jobs.
Seasonality and history favor gains a year from now:
This year’s bear market has now reached the average for length of time. Historically, bull markets have lasted more than three times as long and have provided much more upside than what bear markets have taken away. While anything is possible in the short term, there are several seasonal factors favoring stocks: the fourth quarter is historically the strongest, the third year of a Presidential cycle has historically been the strongest, sentiment was so poor in September that forward-looking returns have historically been stronger than average, and after a decline of 25% or more, which occurred earlier this year, the S&P 500 has historically been higher a year later over 93% of the time. Lastly, the 5.5% gain on November 10th was the 15th largest gain since 1950. All previous instances of these large single-day gains saw the market higher a year later.
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Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.