Weekly Market Commentary – 11/11/2022

-Darren Leavitt, CFA

“Bar the door Katie” What an extraordinary week on Wall Street.  Tuesday’s Midterm elections, coupled with a Crypto stalwart blow-up, were accompanied by a better-than-expected Consumer Price Index report.  US Treasuries and growth stocks ripped higher while the US Dollar Index plunged.  Reports that China could relax its Zero Covid policy pushed Chinese equities higher while also putting a bid into the commodity complex.

The Mid-terms are still undecided, with a Georgia Senate race poised for a December 6th runoff, and a few states are still counting ballots.  The markets generally seem to think we will come out of this election with gridlock in Washington, which in the past has been a good thing for markets.  No tax reform and no new fiscal measures provide investors with some clarity.  If, in fact, we do get gridlock and there are no new fiscal measures, this could allow the Federal Reserve to pursue its monetary policy tightening without conflict from the White House and Congress.  That said, if we go into recession and inflation is still elevated, this gridlock could hinder a fiscal response and prolong a recessionary period.

Volatility in the Crypto markets drew the attention of investors as FTX, a Cryptocurrency exchange, solvency was questioned.  Bitcoin sold off hard, which induced margin calls and what appeared to be forced selling.  The announcement that FTX had a white knight in Binance, another Cryptocurrency exchange, calmed the markets, but the calm was short-lived after Binance announced it was walking away from the deal after its due diligence.  In the end, FTX declared Bankruptcy, and the CEO stepped down.  There are still a number of questions about what went wrong, and there will certainly be ongoing investigations.  This, while a blow to Cryptocurrency markets in the near term, will most likely foster more regulation and help develop a framework for a more credible marketplace.

The anticipated October Consumer Price Index report was the major catalyst for the market’s action.  The lower-than-expected print on both the headline and core number induced a massive rally in the market as investors cheered the notion that we have most likely seen peak inflation.  The headline number came in at 0.4% versus the expectation of 0.6%. The core number that excludes food and energy came in a 0.3% versus 0.5%.  Both readings also improved on a year-over-year basis at 7.7% and 6.3%, respectively.  Goods inflation appears to be waning while services warrants continued attention.  Shelter, which constitutes just over 30% of the index, continued to show increased prices however, this part of the index is considered to have a significant lag, and investors seemed inclined to dismiss the increase given the lag and applaud the pullback in other components.  The softer print reduced the probability that the Federal Reserve would increase its policy rate by 75 basis points at their December 14th meeting and increased the probability of a 50 basis point hike to 89.9%.  Additionally, markets lowered the expectations of the Feds Terminal rate to 4.75%-5% from 5%-5.25%.  US Treasuries screamed higher, with the 10-year yield falling below 4%.  In turn, the US dollar index came under significant pressure losing 4.1% on the week.  Of note, the Federal Reserve will get a look at November CPI on December 13th. It will also get a read on the labor market with the November Employment Situation on December 4th.

Investment advisory services offered through Foundations Investment Advisors, LLC (“FIA”), an SEC registered investment adviser. FIA’s Darren Leavitt authors this commentary which may include information and statistical data obtained from and/or prepared by third party sources that FIA deems reliable but in no way does FIA guarantee the accuracy or completeness.  All such third party information and statistical data contained herein is subject to change without notice.  Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person.  Personal investment advice can only be rendered after the engagement of FIA for services, execution of required documentation, including receipt of required disclosures.  All investments involve risk and past performance is no guarantee of future results. For registration information on FIA, please go to https://adviserinfo.sec.gov/ and search by our firm name or by our CRD #175083. Advisory services are only offered to clients or prospective clients where FIA and its representatives are properly licensed or exempted.