- Some Relief. US equities recovered some ground in October following a notably weak close to the September quarter. The S&P 500 rose about 8% in the month, and the Dow Jones Industrials surged nearly 14%, delivering its best one-month performance since 1976.
- Q3 Earnings Reports. The Q3 earnings season is over 90% complete, and 70% of companies have reported upside surprises to revenue and/or earnings. Overall blended earnings growth was a modest 2%, however, reflecting margin pressure from higher input costs. Energy earnings were a standout, reflecting higher selling prices. Despite a few high-profile misses from familiar names such as Amazon, Google, and Microsoft, earnings season turned out better than feared.
- Another Rate Hike. The Federal Reserve raised rates a fourth consecutive 0.75% in November, bringing its total rate increase for the year to 3.75%. In the press statement, Fed Chair Powell acknowledged the potential lagged effects of rate hikes, and suggested the possibility of slowing the pace of tightening. However, inflation is still high, and the central bank may take rates to a higher level than previously thought.
- Inflation Cools. The Consumer Price Index (CPI) data report released in November provided investors (and consumers) some encouragement that inflation is finally beginning to cool. Housing, rents, used and new car prices, and gas prices are all showing signs of softening. One good report does not signify a trend, however. We will continue to closely monitor the data.
- Jobs Market. The economy continues to add jobs, but the labor market is showing signs of cooling as companies impose hiring freezes and cut headcount. The tech sector, noted for its relatively lush pay and high staffing levels, is among those scaling back. Already, tech firms have cut more than 100,000 jobs, with every day seeming to bring more news of belt-tightening in the sector.
- China. We believe the set-up in China is improving slightly. The government is continuing to relax its restrictive zero-covid policies and is taking steps to stimulate its sluggish economy. The recent approval of an mRNA vaccine is also fueling the reopening enthusiasm. The disruptions to global supply chains that have contributed to global inflation (from tight/erratic supply) should continue to ease as China learns to coexist with the covid virus.
- Market Outlook. The Fed’s aggressive tightening campaign has been the prime contributor to market weakness in 2022. We will need to see continued progress on inflation, which would allow the Fed to step back from its aggressive pace of rate hikes. We have been steadfast in the belief that the present inflation is manageable. The economy is slowing, but a soft landing remains possible, in our view.
