Weekly Market Update

"Clearly today’s seventy-five basis point increase (rate hike) is an unusually large one and I do not expect moves of this size to be common.”

~ Federal Reserve Chairman Jerome Powell on June 15, 2022, after the first 75 bps hike since 1994

The Federal Reserve hiked short-term interest rates seventy-five basis points (0.75%) for the fourth consecutive meeting on Wednesday and stocks were unable to build on October’s strength, as the S&P 500 fell four of five days this week. Entering November, hopes of a deceleration in Fed tightening combined with oversold market conditions and better than feared Q3 earnings results propelled the S&P 500 up almost 8%. However, on Wednesday the Federal Reserve did its best good cop/ bad cop impression, as the FOMC meeting announcements at 2PM struck a dovish tone by flagging a potential near-term slowdown in the pace of rate hikes while acknowledging the need to monitor the lagged effects of tightening on the economy and financial developments. The market initially cheered the Fed’s statement and both stocks and bonds strengthened significantly as hopes of a Fed pause surged. That optimism quickly dissipated, however, as Fed Chair Jerome Powell struck a different and hawkish tone during his 2:30 PM press conference and explicitly stated “it is premature to be thinking about pausing” as he stressed that more rate hikes were needed. As a result, interest rates which had been showing signs of peaking into the end of October, shot higher and stocks moved lower.

While the market reaction to Wednesday’s Fed announcements was volatile, we were not particularly surprised that Mr. Powell and the Fed attempted to speak out of both sides of their mouths. Ultimately, inflation remains higher than most had hoped/expected, and the Fed is in a difficult position of reconciling raising interest rates 375-400 basis points in just nine months versus a headline consumer price index (CPI) over 8%. We were heartened to see the Fed acknowledge the potential for spillover effects from its tightening and the need to watch for the lagged effects, but also understand that Fed Chair Jerome Powell cannot possibly acknowledge a Fed pause until that pause is imminent. We were also encouraged to see the week end on strength, as the S&P 500 rose over 1% for the third straight Friday, a phenomenon that has been exceedingly rare throughout most of 2022, as traders have avoided risk heading into weekends. It was also notable that Friday’s strength coincided with the October jobs report. The headline jobs figure was better than expected (261K vs. 200K consensus), but it was the lowest monthly increase since December 2020 and the unemployment rate rose more than expected from 3.5% to 3.7%. Furthermore, the household labor survey showed notable signs of weakness and amplified a recent surge in corporate layoff intentions with Morgan Stanley, Twitter, and Lyft announcing meaningful cuts, and various big tech companies such as Apple and Amazon announcing hiring freezes. Unfortunately, a weakening labor market is good for stocks and bonds if it compels the Fed to slow its pace of tightening and that likely was a major reason for Friday’s strength. S&P 500 earnings season is now over 85% complete, so investors will shift to monitoring speeches from Federal Reserve members, rumors of China relaxing its zero covid policies, and most importantly, Thursday’s consumer price index (CPI) for October.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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