Review the latest Weekly Headings by CIO Larry Adam.
As we celebrate Veterans Day, we acknowledge and express our gratitude for the service and sacrifice made by the members of the U.S. Armed Forces and their families. Thank you for being always ready, always there! While nothing will rival defending our country, there were plenty of defensive operations and tactics impacting the markets this week. First, Democrats and Republicans had to defend their views in the midterm elections. Second, the October CPI report served as the latest update in the Fed’s fight against inflation.* With Election Day (almost) behind us and with potential for a less hawkish Fed, the S&P 500 is on pace for its best week since June. But how do these two market moving events impact our outlook for the economy and markets moving forward? Here are our insights.
Looking Ahead | The outcome of the midterm elections will not be confirmed until the results in Arizona, Nevada, and Georgia are known, but as it stands the Republicans are projected to have a slight majority in the House and the Democrats are projected to keep control of the Senate. If this projected result proves accurate, few major legislative items are likely to be passed. Therefore, perhaps the most impactful outcome could be an elevated risk of a government shutdown. The good news is that in most cases, downward equity volatility is often short-lived, with equities quickly rebounding. In fact, history shows that since 1976 (20 shutdowns) in the one year following a shutdown, the S&P 500 has been up ~13% on average and been positive 85% of the time.
Looking Ahead | This week, several regional Fed presidents made remarks that it “may soon be appropriate” to slow the pace of rate increases, and investors viewed this data release as support for the Fed easing (not reversing) the tightening cycle. While we’ve said before that one print does not make a pattern, other real-time data continuing to recede suggests that the inflation peak is behind us. Moderating inflation combined with quantitative tightening (the Fed’s balance sheet may soon turn negative on a year-over-year basis for the first time since December 2019) should allow the Fed to step down the pace of rate hikes from 75 basis points to 50 basis points at its next meeting. Even though Chairman Powell has expressed greater concern if the Fed were to do too little rather than too much, the data releases over the next 4-5 weeks (e.g., retail sales, jobs, housing data, November CPI) leading up to the December 13-14 FOMC meeting should permit the Fed to ease the pace of its tightening cycle.
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