November 3, 2022
Market Monitor: October Update
Headlines and Highlights
- Stocks post strong October: A late October rally lifted U.S. and international stocks as investors embraced better-than-expected earnings along with speculation that the Federal Reserve might soon ease the pace of its rapid interest-rate hikes. The S&P 500 erased most of the damage from its worst month in 2½ years in September with its best October (+8.1%) since 2015. Small caps (+11.2%) were the top-performing stocks, although along with other equity asset classes they remained down double digits this year. Bonds added to already-horrific losses in 2022 as interest rates rose further.
- Fed hikes again; Powell says no pause imminent: The Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point for a fourth straight meeting as expected Wednesday while hinting at a slower pace in the near future as it gauges the impact of its aggressive policy. Not yet seeing clear evidence that its war on inflation has been sufficiently successful, the Fed pushed the federal funds rate to a range of 3.75% to 4% – the highest since 2008 – and promised more increases ahead. Chair Jerome Powell suggested the Fed could ease the pace in December or at the following meeting, but called it “very premature” to think about pausing rate hikes and suggested the rate will go higher than previously expected.
- Economy logs best quarter since 2021: The U.S. economy grew at a solid pace in the third quarter, beating expectations and expanding despite high inflation and the Fed’s ongoing rate hikes. Gross domestic product increased at a 2.6% annual rate from July through September following two quarters of negative growth. While the housing sector and some other areas of the economy cooled, GDP got a big boost from a narrowing trade deficit as U.S. retailers exported more goods and imported fewer, a reversal of the situation earlier this year when the trade gap reached a record level.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- The Fed’s reaffirmation of its restrictive monetary policy and Jerome Powell’s clear signal that the central bank is not stopping or reversing its stance means continued volatility ahead for markets. We believe the Fed’s take-no-prisoners approach to inflation is necessary and overdue. However, Powell and his colleagues need to find an opportunity to pause sooner rather than later in order to fully assess the consequences of their tightening on the economy and minimize the risk of a more serious downturn.
- The prospect of additional Fed tightening and lingering above-average inflation delays but does not forestall a market recovery in the coming months. Markets will not wait for the Fed cycle to end or inflation to return to normal before rallying. While delayed, we believe stronger markets are not too distant.
- Prior contributors to elevated inflation including goods prices, construction materials, commodities and used cars have been easing, multiple indicators show, even as the Consumer Price Index remains near a four-decade high. We expect inflation readings to trend gradually lower in the months ahead.
- The U.S. economy has so far weathered the rapid rise in interest rates fairly well, as the 2.6% advance in third-quarter GDP illustrated. We expect growth to come under additional pressure as the previous and future rate hikes work their way through the system, given that monetary policy changes tend to impact the economy with a lag. However, as long as a strong labor market and robust consumer spending persist, we view a deep or protracted economic slump as unlikely.
- Bonds are on track for the worst year on record as a consequence of the Fed’s unexpectedly steep rate-hike cycle. We maintain our belief that bonds serve an important function in portfolios by providing diversification because of their historically low correlations to equities in a stable interest-rate environment and, going forward, their now more attractive yields.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice