It's been an eventful month for the markets. We've had an election, company earnings, and more economic data showing movements in some of the right directions, both up and down. Remember, nowadays, bad news is often taken as good news for the market.
Is bad news good news?
In October, the US economy added 261,000 jobs, a big number but the fewest since December 2020. Meanwhile, the unemployment rate ticked up to 3.7%. While the hiring and unemployment rate are both strong, the report may point to the labor market losing some momentum. Bad news, right? It depends on what perspective you want to take. A cooling labor market is not great for workers, but it may make the Fed more comfortable slowing down its hikes. From a market perspective, a cooling labor market is viewed as good news for the markets, for now.
We also recently received a new inflation reading, showing the Consumer Price Index increased by 7.7% year over year. That's significantly higher than the Fed's 2% target but is the lowest reading that we've had since January. That's the fourth straight month that data showed inflation slowing from its 9.1% reading in June. As with the jobs markets, a 7.7% reading is still too hot, but the signs that it is moving in the right direction are encouraging. When the report came out, the markets (especially growth stocks) boomed. The NASDAQ Composite index notched its 14th best day in history, gaining 7.35% on 11/10/2022.
As we've talked about all year, the challenge for the Fed is getting the economy to a sustainable place without slowing it down too much. The effects of their tightening are cumulative and only felt in the future, not right away. The lag means the Fed has to be accurate in their predictions of the impacts of their move. In today's environment, the Fed is really in uncharted territory. For now, bad news is good news. Eventually, though, we will hit a point where investors will not be cheering on weaker economic data. It's a fine line the Fed is trying to thread.
Election season is done.
It's done, right? The endless ads, the sensationalist doom and gloom speeches, the cross-party hatred. Not quite, with a run-off in Georgia and some races still being tallied, not to mention any post-election challenge lawsuits, election season continues. Nevertheless, there are still some things we can take away from November 8th.
The republicans had been expected to win the house for months, and it looks like that will happen, albeit with a narrower majority than expected. The Senate looks like it will remain in the Democrats' hands. The result will be another extremely narrowly divided congress. That's a recipe for political gridlock, not significant legislative changes.
The next order of business is to reach a compromise to keep the government funded, with the current agreement expiring on December 16th. There is also a retirement savings bill that has a decent chance of passing before the end of the year that would make impactful changes to retirees and retirement savers, such as increasing the RMD age and increasing catch-up contributions. We are primarily just thankful the focus can(somewhat) move on from the election drama and shift gears to actually running the country.
Markets:
Markets had a banner month in October, with the S&P 500 gaining 8.1%; Now, through 11/15/22;
- The S&P 500 is down 15.08% YTD
- International stocks (MSCI EAFE Index) are down 15.15% YTD
- Bonds (Barclays Aggregate Bond Index) are down 13.7% YTD
Source: Kwanti
The Smart Investor
The last time Fed Chairman Jerome Powell spoke, he left the impression that the Fed would remain very aggressive in fighting inflation, with interest rates higher for longer. It will be interesting and impactful to investors to hear if their language softens after their next meeting in mid-December. For now, it seems as if the market expects it to do just that, with stocks running up and yields falling after the latest inflation forecast. We've seen the market predict wrong already this year, though, with the markets running up in June/July only for it to fall again after an aggressive Fed speech.
Markets will likely remain driven by economic data releases and predictions about how the Fed will react, as we saw with the October payroll numbers and inflation numbers. This means volatility (both the good kind and bad kind) will be elevated, as the fear of recession is still at the forefront.
As we enter the final months of the year, focusing on good housekeeping in your financial plan is important. High inflation has meant changes to social security benefits, tax brackets, and tax-efficient savings contribution limits. Take the time to see if you can take advantage of higher brackets and contribution limits into next year. It's also the time to be proactive with your year-end rebalancing and tax-loss harvesting to make the best of the losses that you may have this year. If you have questions, concerns, or anything you'd like to talk about, please reach out to us.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
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