Michael Jackson’s Thriller is often considered to be the best music video ever made. The video is every bit as theatrical as it is musical, evoking themes of horror films and therefore tends to receive substantial radio playtime this time of year, around Halloween. Thriller movies, as a genre, often give viewers heightening feelings of suspense, excitement, and anticipation. Even though it is likely most of us have felt those same feelings in regard to the markets this year, chances are they could be amplified over the next couple of weeks with a flurry of activity.
Equities were higher for a second straight week, driven largely by the uptick in quarterly earnings reports as well as third quarter GDP surprising to the upside. Despite weathering some blows in the form of multiple megacap earnings disappointments, the markets remained resilient, nearing levels not seen in a month. This does beg the usual question of whether this is another bear-market rally, as we have experienced multiple times this year, or is this a move with some traction, perhaps the beginning of a sustained rebound?
The market seemed to take some support from the idea the Fed could soon begin to slow the pace of tightening (“step down”) or even take a break to allow the Fed to evaluate lagged policy impacts. Corporate commentary during earnings calls has been cautious, flagging increased macroeconomic uncertainty, lingering supply chain issues, and inflation challenges. On the positive side, consumer resilience seems to remain intact. And therein lies our issue – markets continue to be largely driven by Fed action, which is dependent upon inflation data. The employment situation remains robust, leading to higher wages and further supporting consumer spending, both of which contribute to ongoing inflation. The longer the Fed raises interest rates, the higher the probability of a recession. It seems we are stuck in a continuous feedback loop, and it will not be until something “breaks,” most likely either labor markets or consumer sentiment, that the Fed is likely to let off the gas pedal.
The events of the next two weeks will shape the outlook of the markets for the remainder of the year. On Wednesday of this week the Federal Reserve will announce its latest interest rate decision, which is highly anticipated to be a 75-basis point, or three-quarters of one percent, hike for the fourth time in a row. Since that move is already widely expected, it is not the announcement itself that will drive markets but rather the comments afterwards. The Fed should give hints about its expected path forward, possibly signaling plans to ease back from the aggressive pace of rate hikes, which could provide thrust for the stock market. Conversely, if the comments lead toward continued rate hikes of similar magnitude, akin to Fed Chairman Powell’s comments in Jackson (WY) in August, it could send markets lower.
Employment reports will be released on Friday, which could influence further Fed action. As was mentioned earlier, if the labor market remains robust and steady, despite being good news for the economy and workforce, it could be bad news for the stock market since it may be perceived the Fed will need to maintain their current course of tightening. The same can be said for the inflation reports being released next week, which are likely to have an even larger influence on Fed policy, especially their December meeting. Also occurring next week are the mid-term elections. Polls seem to be trending in the direction of the party not currently in power. This is viewed positively by the markets since many of the policies enacted by the current Administration are not always seen as being friendly to the markets and inflation. If the opposing party were to gain control of Congress it would cause at least somewhat of a stalemate, limiting the ability of the current Administration to take further action. If the outcome is as the polls indicate, it could be a boost for the markets. Overall, the markets simply do not like uncertainty so simply getting past the election should provide some tailwinds.
In addition to the aforementioned events, earnings reports continue in earnest this week. We expect to hear the same themes, primarily around continued inflationary pressures leading to lower profit margins but also consumer spending remaining strong. Outlooks for many companies have been tepid given the great deal of economic uncertainty. There was interesting action in the longer-end of the yield curve last week with bond yields falling rather dramatically. This would indicate future projections for growth and interest rates are falling. Also, the yield of the 3-month T-bill has now fallen below that of the 10-year Treasury Note which historically has been a strong predictor of a future recession. We continue to believe there will be a recession sometime in 2023, however we also think it will be mild and relatively short-lived. We also are of the belief that the markets and economy, which very much related, are not one in the same and therefore a recession does not necessarily mean continued pain in the stock markets.
Your retirement plan should not be like a movie and cause feelings of suspense and anxiety. Make sure you have a solid plan in place so you can enjoy a worry-free retirement, regardless of what happens in the markets. If you would like to ensure you are on-track, call us for a free evaluation using our TaxSmartTM Retirement Scorecard.
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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