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WEEKLY MARKET COMMENTARY | OCTOBER 20, 2022
We’re not there yet.
Investors are understandably eager for the stock market to hit bottom. Some hoped it happened last week, but it did not.
Despite the Fed’s rate hikes, last week the Consumer Price Index showed the annual rate for headline inflation was 8.2 percent in September. That’s down from June when the annual inflation rate was 9.1%, but a long way from the Federal Reserve’s two percent target. The core inflation numbers, which exclude food and energy, hit at a 40-year high last month.
The news rocked the markets. “A lot of investors are looking at inflation to get guidance on what the Fed is going to do, to find the bottom in the market once the Fed pivots…But looking at CPI, unemployment, there’s obviously a lot of heat in the economy. Inflation is going to take some time to come down,” said a source cited by Stephen Kirkland and Lu Wang of Bloomberg.
After the news broke on Thursday, the Standard & Poor’s (S&P) 500 Index fell 2.4 percent. The sharp drop made some investors wonder whether the bear market had finally bottomed. The Index reversed course and finished the day up 2.6 percent, reported Ben Levisohn of Barron’s. That’s a big swing.
Then, on Friday, the University of Michigan’s Consumer Sentiment Survey was released. The good news was consumers were feeling slightly more optimistic in September. The bad news was expectations for inflation over the coming year rose slightly. Survey participants anticipated inflation would average 2.9% over the year ahead.
Inflation expectations are important because inflation has a psychological component. If people expect inflation to be higher – and behave that way – then they could cause inflation to move higher. For example, if a company expects higher inflation, it may increase prices at a faster rate than it would otherwise. If workers expect inflation to move higher, they may ask for larger wage increases than they would otherwise. These types of actions push inflation higher.
The S&P 500 headed down again on Friday and finished the week lower. The Nasdaq Composite Index also finished down, but the Dow Jones Industrial Index moved higher as some of the companies in the Index reported solid earnings. Treasury rates rose last week, with the 2-year Treasury yielding 4.48 percent and the 30-year Treasury yielding 3.99 percent.
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Sources:
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm
https://www.barrons.com/articles/stock-market-dow-nasdaq-sp500-51665789304?mod=hp_LEAD_2&noredirect=y (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/10-17-22_Barrons_The%20Stock%20Markets%20Rebound%20Fizzled%20Again_3.pdf)
https://www.bloomberg.com/news/articles/2022-10-13/asia-stocks-set-to-join-wild-ride-higher-after-cpi-markets-wrap?srnd=markets-vp (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/10-17-22_Bloomberg_Stocks%20Upended%20by%20Inflation%20Surveys%20Sobering%20View_4.pdf)
http://www.sca.isr.umich.edu
https://www.clevelandfed.org/en/newsroom-and-events/cleveland-fed-digest/ask-the-expert/ate-20190528-rich.aspx
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202210
https://www.brainyquote.com/quotes/sallie_krawcheck_899560
https://www.brainyquote.com/quotes/john_c_bogle_1119994
https://www.brainyquote.com/authors/john-w-rogers-jr-quotes
https://economictimes.indiatimes.com/markets/stocks/news/bluechip-stocks-guru-geraldine-weiss-success-mantra-bet-on-high-dividend-paying-companies/articleshow/81124897.cms?from=mdr
https://www.barrons.com/articles/stock-market-inflation-fed-interest-rates-51665776799?mod=hp_columnists&noredirect=y (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/10-17-22_Barrons_Its%20Time%20for%20Bargain%20Hunting_13.pdf)
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