Market Update 11-12-2022

• It was a very busy week, as the highly anticipated mid-term elections might have actually been overshadowed by the release of October's Consumer Price Index data, at least as far as Wall Street was concerned
• Wall Street was probably hoping for a divided government, but as of Friday's market close, there were still too many states that have not yet called races, so that the final results are still not known
• But two days after election day, CPI data was released and it came in lower than expectations, pushing markets to their best day since April 2020 on the way to a very positive week
• Thursday saw NASDAQ skyrocket 7.4% and the S&P 500 leap 5.5%, with a lot of the technology and growth names jumping more than 10% on the day
• Every one of the 11 S&P 500 sectors was up this week, with Information Technology leading the way with a 10.0% gain, followed by Communication Services (+9.2%), Materials (+7.7%), and Real Estate (+7.1%)
• Cryptos struggled this week as FTX faced a liquidity crunch and ended up filing for Chapter 11 bankruptcy, dragging down the crypto group, including Bitcoin, which lost almost 20% on the week
• The 10-year Treasury note dropped an astonishing 31 basis points to 3.84% and the 2-year Treasury cratered 32 basis points to 4.31%
• The dollar also dropped quickly this week, with the U.S. Dollar Index plummeting a crazy 4.0% on the week to 106.42

Weekly Market Performance

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks Leap As Yields Drop

The major U.S. equity indices turned in an exceptional week, as lower-than-expected inflation numbers gave Wall Street hope that maybe inflation has peaked and maybe the Fed will be less hawkish at its next Fed meeting in December.

The first few days of the week were relatively benign, but when CPI data was released Thursday morning, markets jumped to their largest one-day gain since April 2020. Not surprisingly, growth stocks – especially the technology names – led the rally, on the belief that falling yields will benefit future growth.

Glass-half-full investors were celebrating that the Consumer Price Index only rose 0.4% last month, whereas consensus expectations were for a 0.6% rise. But the 12-month number of 7.7% is still stubbornly close to a 40-year high and certainly well above the Fed's target rate. Which is probably why the futures market is assuming that there will be another major fed funds rate hike in December, with Wall Street predicting a 50 basis point hike versus a 75 basis point one.

Despite the feeling that the Fed will likely raise rates by 50 basis points in about 30 days, Wall Street (and Main Street) took the wins where possible, including that ;

• the year-over-year core (less food and energy) reading fell to 6.3% from a 40-year high of 6.6% in September;
• Used cars and trucks fell in October; and
• Prices for apparel and medical services also pulled back.

Glass-half-empty investors, on the other hand, were worried that the cost of shelter continues to rise, jumping 0.8% last month, the biggest increase in over 3 decades.

Consumer Price Index Rises, But Less Than Expected

The Consumer Price Index for All Urban Consumers rose 0.4% in October on a seasonally adjusted basis, the same increase as in September, said the U.S. Bureau of Labor Statistics. Over the last 12 months, the all items index increased 7.7% before seasonal adjustment.

Consumer Price Index 12-Month Percentage Change

"The index for shelter contributed over half of the monthly all items increase, with the indexes for gasoline and food also increasing. The energy index increased 1.8% over the month as the gasoline index and the electricity index rose, but the natural gas index decreased. The food index increased 0.6% over the month with the food at home index rising 0.4%.

The index for all items less food and energy rose 0.3% in October, after rising 0.6% in September. The indexes for shelter, motor vehicle insurance, recreation, new vehicles, and personal care were among those that increased over the month. Indexes which declined in October included the used cars and trucks, medical care, apparel, and airline fares indexes.

The all items index increased 7.7% for the 12 months ending October, this was the smallest 12-month increase since the period ending January 2022. The all items less food and energy index rose 6.3% over the last 12 months. The energy index increased 17.6% for the 12 months ending October, and the food index increased 10.9% over the last year; all of these increases were smaller than for the period ending September."

Consumer Sentiment Drops

The University of Michigan reported that "consumer sentiment fell about 9% below October, erasing about half of the gains that had been recorded since the historic low in June. All components of the index declined from last month, but buying conditions for durables, which had markedly improved last month, decreased most sharply in November, falling back 21% on the basis of high interest rates as well as continued high prices. Overall, declines in sentiment were observed across the distribution of age, education, income, geography, and political affiliation, showing that the recent improvements in sentiment were tentative. Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election.

Inflation expectations are little changed. The median expected year-ahead inflation rate was 5.1%, up from 5.0% last month. Long run inflation expectations, currently at 3.0%, have remained in the narrow (albeit elevated) 2.9-3.1% range for 15 of the last 16 months."

Consumer Credit Rises

On November 7th, the Fed reported that consumer credit rose by $25.0 billion in September, below the $32.0 billion consensus forecast and at the low end of the range of forecasts. Further::

• Consumer credit increased at a seasonally adjusted annual rate of 6.8% during the third quarter.
• Revolving credit increased at an annual rate of 12.9%
• Nonrevolving credit increased at an annual rate of rate of 4.9%.
• In September, consumer credit increased at an annual rate of 6.4%.

Consumer Credit Over the Last Year

In dollar terms:

• Consumer credit rose by a revised $30.1 billion in August vs. the $32.2 billion previously reported.
• For September, non-revolving credit, where student loans and motor vehicle loans are tracked, gained $16.6 billion.
• Revolving credit, reflecting credit card debt, rose $8.4 billion.

Sources

bls.gov;  federalreserve.gov;  umich.edu;  msci.com;  fidelity.com;  nasdaq.com;  wsj.com;  morningstar.com