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2020 Financial Markets Update

Week in Review: November 11, 2022

November 14, 2022

Recap & Commentary

Markets ended the week higher on encouraging inflation data and renewed hopes that the Federal Reserve will begin to take a less aggressive approach to monetary policy. Equities jumped on the news, with the S&P 500 gaining 5.5% on Thursday, its largest single-day gain since April 2020. Bond markets also rallied, with the 10-Year Treasury yield falling 0.30% to 3.82%, its largest one-day decline since 2009. As a reminder, yields fall when bond prices rise.

Headline consumer inflation rose 0.4% in October, the same pace as September, but 0.2% less than expected. Compared to a year ago, inflation decelerated from 8.2% to 7.7%. The consensus expectation had been 8.0%. Perhaps more importantly, core inflation decelerated after rising during the prior two months. Given the Fed’s focus on core inflation, the slowing was encouraging.

In addition to inflation data, markets were focused on the midterm elections, where it was widely anticipated that Republicans would gain control of the House of Representatives and potentially the Senate. As of this writing, Democrats have retained control of the Senate but are likely to lose control of the House. Such an outcome may bode well for the markets moving forward, as the prevailing thought is that markets generally prefer mixed government, as it results in fewer policy “surprises” and thus more certainty.

Through Friday, 91% of S&P 500 companies had reported earnings. Thus far, 69% have beaten their earnings estimate. According to industry group FactSet, 3Q22 aggregate S&P 500 earnings growth is expected to be 2.2%.

Economic Commentary

Headline consumer inflation (CPI) rose 0.4% for the month, with shelter prices accounting for over half the increase. On an annual basis, headline prices rose 7.7%, led by 17.6% and 10.9% increases in energy and food prices, respectively. Excluding food and energy prices, core CPI slowed from 6.6% to 6.3%, aided by slowing prices for apparel, used vehicles, and medical care.

Consumer sentiment unexpectedly declined as consumers’ views of current and future conditions deteriorated. Somewhat offsetting the positive CPI inflation data, consumers’ 1- and 5-year inflation expectations rose 0.1% to 5.1% and 3.0%, respectively. The increase will certainly be noticed by the Fed, given their concern about inflation expectations becoming untethered.

Consumer credit rose $25B in September. Except for January, consumer credit has increased by $20B or more each month in 2022. Through September, growth in consumer credit has averaged $30B/month in 2022, the highest monthly average on record and 50% greater than the second-highest average of $20B/month recorded in 2021. As consumers struggle with negative real wage growth in the face of elevated inflation, they appear to increasingly turn to credit cards to fund spending.

Of Note

What a difference a week will make. A week ago, Sam Bankman-Fried, founder of FTX, one the largest cryptocurrency exchanges, was worth $16B and widely viewed as a crypto savant. Following a liquidity crunch on Friday, Bankman-Fried’s companies filed for bankruptcy, vaporizing his wealth. In addition, Bankman-Fried is being investigated by regulators for securities law violations.

S&P 5005.9%
Small Caps4.6%
Intl. Developed8.4%
Intl. Emerging5.7%
U.S. Bond Market2.2%
10-Year Treas. Yield3.82%
U.S. Dollar-4.0%
WTI Oil ($/bl)$89
Gold ($/oz)$1,774

The Week Ahead

  • Producer Inflation (PPI)
  • Housing Starts
  • Existing Home Sales
  • Retail Sales
  • Industrial Production
  • Weekly Jobless Claims

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