November Economic Update
October was a choppy month with new lows for the year being made from a disappointing CPI release, followed by rebounds from earnings reports back into the ranges from June and July. To end the month, the major market indices ended in the green with the Dow Jones Industrial Average was the outlier last month gaining 13.95%. The S&P 500 rebounded 7.99%, while the Nasdaq Composite retraced 3.90%. (1)
The same underlying macroeconomic forces were top of mind again last month: inflation and interest rates. Hopes were high for progress to be made on the inflation front when the latest Consumer Price Index (CPI) numbers were released on October 13th. The data showed year-over-year increases of 8.2% with month-over-month inflation rising 0.40%, both of which were higher than expected. (2)
As we saw back in September, the Federal Reserve raised interest rates by another 0.75% in response to the disappointing inflation data. Fed Chair Jerome Powell reiterated that rates would be going higher than expected as we move towards the beginning of 2023 – likely into the 5.25-5.75% range before pausing rate increases. While these are ballpark ranges for rates, the actual peak interest rate will be data-dependent based upon subsequent inflation reports.
October kicked-off another quarterly earnings season and the results have been mixed. As of November 4th, 85% of companies within the S&P 500 had reported. Corporate earnings (measured as earnings per share) beat expectations with 70% of companies reporting above expectations. While this was above what most analysts had anticipated for the quarter, it is below the 5-year average of 77% and below the 10-year average of 73%. In addition, there were more companies this quarter lowering forward guidance than we saw during the 2nd quarter earnings season. (3)
In summary, corporate earnings have beat expectations this quarter, but the rate of change for earnings growth is declining which is being reflected in stock valuations. As of the writing of this newsletter, both the broad-based S&P 500 and tech-oriented Nasdaq 100 are little changed since earnings season began in the beginning of October.
This month, as well as the remainder of the year, will likely revolve around the same headlines and narratives regarding inflation and interest rates. There are several forward-looking indicators which imply sharp disinflationary moves lower for consumer prices into the beginning of 2023. If that forward guidance is correct, then we could see the Federal Reserve begin to ease the pace of interest rate increases into the first or second quarter of next year.
The Federal Reserve has remained firm regarding their goals and expectations which include seeing numerous consecutive months of declining inflation rates. The next CPI release will be on Thursday, November 10th which will set the tone for the Fed’s interest rate decision in December.
Monthly Financial Tip:
Collaboration among investment, legal, and accounting professionals may make a big difference in the scope and execution of a financial strategy.
1. WSJ.com, September 30, 2022
2. WSJ.com, September 13, 2022
3. WSJ.com, September 21, 2022
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.