by Bryan Perry
October 4, 2022
Following the disappointing inflation data in the form of the Core (excluding food and energy) PCE Index, the third quarter closed with a resounding thud. The key takeaway from the report is that the inflation rate the Fed says it can control (mostly, the prices of goods and services purchased by consumers) ticked higher in August by 0.6% against forecasts of 0.4%. Hence, investors can expect the Fed to continue with its tight monetary policy and unabated quantitative tightening.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The latest CME FedWatch Tool has a 56.5% probability of the Fed raising the Fed Funds Rate by a fourth straight 75-basis point hike at the November 2 FOMC meeting. This will take the short-term overnight lending rate (which banks charge each other) to 3.75%-4.00%. For the December 14 FOMC meeting, there is already a 53.9% probability that the Fed will hike by an additional 50 basis points, taking the rate up to 4.25%-4.50%, where it is presumed that the heavy lifting of monetary policy will be complete.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed’s dual mandate of maintaining full employment and controlling inflation is under severe testing, as the fourth quarter is a time of massive hiring by the retail industry for holiday sales. These are mostly seasonal jobs, so the bigger issue is the minimum wage, which will rise in many states in January, based on the 8.3% increase in the CPI over the past year, as reported by the U.S. Bureau of Labor Statistics.
This Friday will bring the employment data for September where Non-Farm Payrolls are expected to increase by 250,000 and the Unemployment Rate to tick higher to 3.8% from 3.7% in August. The higher rate indicates a rising labor participation rate (more people entering the workforce). The major problem continues to be the upward pressure on the cost of making things and providing professional services.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The average 30-year fixed rate mortgage closed last week at 7.53% according to BankRate.com. It is safe to say that 8.0% mortgage rates are on the horizon, which should put some downward pressure on home prices. All the housing data for September will be released the week of October 17, so stay tuned.
Next up is third-quarter earnings season, set to kick off the week of October 10-14. That is almost certain to bring about a highly mixed set of sales, profits, and forward guidance. According to the latest FactSet Earnings Insight forecast, released on September 30, for Q3 2022, the estimated earnings growth rate for the S&P 500 is 2.9%. If 2.9% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%), and the forward 12-month P/E ratio for the S&P 500 is 15.4. This P/E ratio is below the 5-year average (18.6) and below the 10-year average (17.1).
Analysts have revised third-quarter earnings lower by the largest margins in more than two years, which is clearly being reflected in the price action of most stocks.
The big question on most investors’ minds is whether the market has priced in the next one or two rate hikes, the impact of the strong dollar, and lower earnings expectations. It would seem a good deal of these fears have been priced in, since they are the most widely discussed topics in financial circles.
What the market doesn’t know, and it’s a biggie, is the outcome of the mid-term elections. A win in the House by the GOP is already being factored into most scenarios, as the majority of Americans say that the economy and inflation is their #1 concern. Republicans need to pick up just five (out of 435) seats in the House to grab a majority. With partisanship so intense these days, it will soon be gridlock for any new major legislation getting passed. The overturning of Roe v. Wade has stunted Republican momentum to win the Senate, but in the event the GOP wins the House, the market will likely cause to move higher.
So, there you have it. Mark your calendars for the fireworks of data to explode over the next month.
October 7 – Employment Data
October 10 – Earnings Season Begins
October 12/13 – CPI and PPI Data
October 14 – Retail Sales
October 18-20 – Housing Data
October 28 – PCE (Core) Inflation
November 2 – FOMC Interest Rate Decision
November 8 – Mid-term Elections
In between these dates, we’ll see the usual releases of industrial production, ISM manufacturing, ISM services, consumer sentiment, energy inventories, durable goods, factory orders, and inventories will all be reported, but the market will hang most on those key reports noted with their corresponding dates of release.
It should be quite a show, and if history is any guide, there is reason for optimism:
“… the stock market in 2022 has generally followed the downward path typical for a midterm election year since 1962, according to Dan Clifton at Strategas. The S&P 500 is down slightly more than the typical 19% intra-year decline, but the news improves if stocks stick to the script. Stocks have historically bottomed in October and rallied by an average of almost 32% in the next 12 months. Clifton notes that stocks have been positive in the year after every midterm election since 1942!”
— From Forbes, October 2, 2002: “Midterm elections: Politics of the Stock Market”
That’s an amazing winning streak and would coincide with the near-capitulation price action that has a firm hold in market sentiment.
Investors have been holding out for the Fed to pivot, but just maybe the stock market will pivot first.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Is the Fed Making Yet Another Big Mistake?
Income Mail by Bryan Perry
Eighty Years of History Say the Market Will Pivot Higher After the Elections
Growth Mail by Gary Alexander
Whoever’s Writing This Movie Script Probably Planned a Surprise Ending
Global Mail by Ivan Martchev
The Fed is Making the Same Mistake Twice
Sector Spotlight by Jason Bodner
A Mega-Hurricane Hit Florida – And Global Markets
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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