Weekly Market Update - November 2

The negative growth in the first half of 2022 was reversed in the third quarter. The initial reading of third-quarter gross domestic product (GDP) came in at +2.6%; added to the -2.2% GDP from the first six months, the economy is basically flat for 2022 at +0.4%.

At a minimum, the discussion of are-we-or-are-we-not in a recession should come to a halt. The difficult truth remains that we’ve had nearly zero growth this year, coupled with extremely high inflation. At the same time, interest rates are moving steadily upward. It’s not exactly a recipe for a robust and healthy economy, but rather one that is resilient enough to withstand periods of uncertainty. Despite the top-line number, the report still offered indications of a slowing economy, dragged down by high inflation, rising interest rates, and reduced consumer spending.

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Third-quarter growth is the continuation of an upward trend, with much of the increase coming from exports thanks to the strong dollar, such as sales from our Strategic Petroleum Reserve. Imports declined due to slowing consumer demand as spending slowed and businesses have been building inventory levels.

The Federal Reserve's interest rate increases have had a visible effect, with the housing market contracting as residential investment dropped 26.4% last quarter. GDP becomes a less reliable indicator of economic health and growth when housing investment — comprising 16% of our GDP — sputters in response to 30-year fixed mortgage rates climbing over 7%.

Big tech earnings weren’t stellar — but the market pushed forward

Google, Microsoft, Meta, Amazon and Apple all reported earnings last week. Results were mixed — and mostly discouraging. All but Apple are having difficulties sustaining the uninhibited growth they have experienced for the past decade. With Meta leading the way, the other four combined to experience a collective $350 billion loss in market cap. On Friday, Apple's earnings eclipsed Amazon’s dour results and markets finished the week in a strong fashion.

Even though earnings weren’t stellar, the market took it all in stride and sees the accumulation of mediocre-to-poor earnings and data as the reason for the Fed to slow its pace on future rate hikes. There is a lot riding on this week’s Fed meeting; a change in tone could send markets sharply higher, but it could either way if the Fed doubles down on its hawkish language. Markets could stumble, although another 1.25% to 1.5% may already be priced in. What is not priced in is a continued rise in Fed Funds rate, and any hint of higher rates could send markets running for cover.

To this point, new lows have come every time we notch another half-point on the 10-year U.S. Treasury. We saw the first low of 2022 when the 10-year hit 3.5% in June, then we hit the next low at the end of September when the 10-year reached 4%. Good news came today as the 10-year dipped back below 4%, signaling a potential Fed policy change. October has been advertised as the traditional bear-market killer, and this month has been strong. Let’s be optimistic that we continue this strong showing as we close out the year.

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Looking Ahead:

• Earnings will continue in a major way this week, with over 2,500 companies reporting. This should be the biggest week, and after that, fewer companies will be reporting. Once again, earnings have been mostly better than expected, but there have been some high-profile misses. Earnings will continue to have an outsized impact on the market this week.
  

• The Fed will meet on Tuesday and Wednesday this week. Current expectations are for a fourth consecutive hike of 75 basis points (.75%), bringing the fed funds rate to 3.75% to 4%. Although a surprise announcement on rates will move markets, the bigger concern will be what kind of guidance the Fed will provide for continuing rate hikes. Will we see a shift in their posture? Right now, the Fed is targeting the fed funds to be 4.25% to 4.5% by the end of the year, which would mean a raise of 50 basis points (.50%) in December. Expect markets to take off if we see a softening; if we hear a continued hawkish tone that challenges current expectations, markets could turn sour.
  

• We'll get the latest Job Openings and Labor Turnover Survey (JOLTS) number on Tuesday, the ADP employment report on Wednesday and the Bureau of Labor Statistics (BLS) employment situation on Friday. Unemployment was at 3.5% last month, and we are expected to stay in the 3.5% to 3.7% range.