Spooky and Scary
Halloween is based upon traditional celebrations of remembering the dead, hence the symbolism of spooky ghosts, zombies, and skeletons. This event, despite rather dark undertones, now tends to be a time of fun, especially for children. The markets, both stock and bond, have been scary this entire year and for most savers and investors, have been devoid of fun. Will this end soon and will we return to better days?
Equities were higher last week with the major indices more than rebounding from the previous week’s declines, which saw the markets fall to their lowest levels since 2020. It was the strongest weekly performance for the S&P 500 and Nasdaq since June and one of the best weeks of the year. These gains came on the heels of decent earnings reports. Given the current economic backdrop, analysts have lowered earnings estimates for the quarter so positive price movements last week may indicate that much of the bad news had already been baked into the markets. Key themes from earnings included elevated labor and freight costs as well as mixed signals on consumer demand. Goods producers reported weakening demand while service companies, including travel and hospitality, showed consumers remaining resilient.
Bond markets made relatively large moves last week with interest rates continuing to move sharply higher. Yields on short-term debt instruments look very compelling for the first time in over 15 years. But yields are still less than inflation, meaning that investors will not maintain purchasing power. Also, while providing relative safety and being an option for short-term investments, long-term investors allocating to bonds could mean missing out on a stock market rebound. Many market prognosticators are predicting the markets will drop further, which may very well end up being the case, but even if it is, we still feel that we are much closer to the bottom than the top and investors will eventually be rewarded for their perseverance. A quick market rebound seems unlikely, but our view remains that stocks maintain an attractive risk/return profile over a longer time horizon.
Trick or Treat
Currently markets are primarily focused on monetary policy action from the Federal Reserve so what may have provided the most thrust for the markets last week were comments from Fed officials stating that we are likely to see a “step-down” in interest rate increases, beginning in December where current expectations are now for a 50-basis point (one-half of one percent) rate hike. While not the “pivot” wanted by some, this is still viewed positively by the stock markets since it would be the first step towards ending interest rate increases and eventually leading to the pivot of lowering rates. Looking past December, as of now, market expectations are for a 25-basis point (one-quarter of one percent) rate hike next February and then the Fed will pause, waiting until December 2023 to begin lowering interest rates, continuing into 2024. However, much will happen between now and then and it is all but guaranteed these forecasts will change as we see shifts in inflation and economic growth.
Also helping push markets higher is the removal of uncertainty. With CPI being recently reported and an all-but foregone conclusion the Fed will raise interest rates by another 75 basis points in November, the only major uncertainty in the short-term are the upcoming elections. The mere fact that we will soon know the outcomes should provide tailwinds for the markets and there is a real possibility we could see a “melt-up” in the markets during the last two months of the year. While a reprieve from this year’s selling would be most welcomed, moves higher may only be temporary. With a recession looming on the horizon, 2023 is setting up to be another difficult year and we can certainly expect continued volatility. However, looking out longer term, into 2024 and beyond, we remain very optimistic and still believe the stock market will provide ample opportunity for increasing wealth of investors.
The week ahead represents the peak of this earnings cycle since it will be the busiest, including the mega cap tech names. As always, the focus may not be on the earnings themselves, which are backward-looking, but rather the outlook and future guidance provided. Investor optimism remains historically low but may improve if earnings remain solid and we continue to see gains in the markets. The major economic report of the week will be Q3 advance GDP. Will it be a third quarter in a row with negative real GDP growth? Analysts estimates say not and expectations are for a positive number, but these same analysts have been inaccurate in the past. We do not feel the reported GDP number will be very meaningful since there are so many other indicators of economic growth which presently do not point toward this being a recession. However, if the GDP report comes in better than expected, it could be a catalyst to push the stock market higher, at least on a short-term basis. A worse than expected report will likely be discounted and have minimal impact.
Perhaps one of the most recognizable symbols associated with Halloween is the jack-o-lantern, which was traditionally thought to scare evil spirits. While no jack-o-lantern can scare away bad markets, there are steps you can take to protect your portfolio and retirement. If you are spooked by the markets, we are here to help you develop a worry-free retirement plan.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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