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2020 Financial Markets Update

Week in Review: November 18, 2022

November 21, 2022

Recap & Commentary

Markets ended the week lower as waning enthusiasm from the prior week’s consumer price report was unable to overcome hawkish comments by multiple Federal Reserve members and disappointing earnings reports from a key retailer, Target.

Following the prior week’s consumer price index (CPI) report, markets surged in hopes the Fed might take a less aggressive approach to monetary policy moving forward. In what appeared to be a coordinated effort to temper those expectations, multiple Fed members expressed the need for the Fed to remain vigilant in its efforts to fight inflation. St. Louis Fed President James Bullard suggested that under certain scenarios, the Fed might have to raise rates as high as 7% to lower inflation. While unlikely, it reinforced the notion that the Fed must remain aggressive in its fight against inflation.

On Thursday, Target spooked the markets with its 3Q22 earnings report saying that “consumers are showing increasing signs of stress and pulling back from discretionary purchases.” In addition, Target cut its 4Q22 outlook and announced plans to cut $3B in costs over the next three years. The results contrasted with those of Walmart, which raised its 4Q22 earnings guidance. Several factors help explain the difference in results, but in general, Walmart appears to be benefiting from higher-income shoppers “trading down” to shop at Walmart. In addition, Target generates a large percentage of sales from discretionary items, which consumers are currently cutting back.

Through Friday, 94% of S&P 500 companies had reported 3Q22 earnings. Thus far, 69% have beaten their earnings estimate. According to industry group FactSet, aggregate S&P 500 earnings growth is expected to be 2.2%.

Economic Commentary

October producer price index (PPI) data reinforced CPI data from the prior week showing inflation decelerating. Compared to a year ago, headline PPI slowed from 8.4% to 8.0%, while core PPI, excluding food and energy prices, slowed from 7.1% to 6.7%.

Housing market activity continued to buckle under the weight of higher mortgage rates, with existing home sales falling 5.9% in October, marking the 9th consecutive monthly decline. Compared to a year ago, sales were down 28.4%. Excluding pandemic-induced disruptions in 2020, existing home sales now stand at their lowest level since December 2011. Housing starts and building permits also fell in October, down 4.2% and 2.4%, respectively.

Retail sales surprisingly accelerated 1.3% in October after being flat in September. However, data from Mastercard and other sources suggests that consumers, faced with historically high inflation, are increasingly basing their shopping around sales and promotions offered by various retailers.

Of Note

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information… the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals… is unprecedented.”

– John Ray III, new FTX CEO hired to guide the failed cryptocurrency company through bankruptcy and previously led the restructuring of Enron.

S&P 5000.5%
Small Caps-0.7%
Intl. Developed-1.8%
Intl. Emerging0.2%
U.S. Bond Market-1.7%
10-Year Treas. Yield3.78%
U.S. Dollar0.6%
WTI Oil ($/bl)$80
Gold ($/oz)$1,752

The Week Ahead

  • Durable Goods Orders
  • New Home Sales
  • Consumer Sentiment
  • Weekly Jobless Claims

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