Stock market recap
The markets swung positive in October, ending two months of losses for all major indexes, including a brutal September.
For the month, the three major indexes performed as follows:
Dow Jones Industrial Average 13.96%
S&P 500 7.99%
Nasdaq Composite 3.90%
It was the best month since 1976 for the Dow.
The next two weeks will be huge to see how the markets respond going forward. A Fed meeting that’s surely to see another big rate hike (Nov. 1-2), the CPI (inflation) report (Nov 10), jobs/unemployment report (Nov. 4), and even midterm elections (Nov. 8) all will be closely watched by investors and Wall Street.
Annual inflation fell only marginally from August to September (latest data), a fact that may have the Fed scratching their heads and ready to hit the button on another big rate hike in December.
The annual inflation rate rose to 8.2% for the twelve-month period through September 2022, according to US Labor Department data. That represents only a minimal decline from August’s 8.3% annual inflation rate.
Additionally, the Consumer Price Index (CPI) rose +0.4% in September, a number that is sure to concern the Fed after the CPI climbed only 0.1% in August.
The largest monthly price increases came in the categories of food (+0.8%), shelter, and medical care, while gasoline fell by 4.9%, and the broader energy sector fell by 2.1% for the month.
The next official inflation report comes on November 10th, offering an update on annual inflation over the previous 12 months ending through October 2022.
As I write this, the Fed is most certainly raising their fed funds rate another three-quarter-points at their November 2nd meeting.
Annual inflation fell only marginally from August to September (latest data), a fact that may has the Fed scratching their heads and ready to hit the button on more big rate hikes. But will they go too far?
At their next December 13-14 meeting, the final of the year, there is some uncertainty if the Fed will continue its aggressive push against inflation. The possibility for tapering down with a half-point increase, for instance, is on the table.
“The time is now to start talking about stepping down. The time is now to start planning for stepping down,” said San Francisco Fed President Mary Daly.
The latest GDP report showed unexpected positive growth, as the US economy expanded by 2.6% in Q3 of 2022, according to advance estimates.
That 2.6% growth surpassed estimates of 2.3% growth and bucked the Q1 (-o.6%) and Q2 (-1.6%) trend of negative GDP growth.
The report of positive GDP growth in Q3 also staves off some concerns that we’re in the midst of a recession, although the common definition that a recession is at least two successive quarters of negative GDP growth is not comprehensive.
According to the Bureau of Economic Analysis report, the sound Q3 growth is in part thanks to increases in consumer spending, government outlays, and a shrinking trade deficit. However, a swooning housing market proved to be the biggest anchor on GDP growth.
While inflation is pushing prices higher, US consumers continue to spend at a robust rate, although we may see signs of slowing discretionary (non-essential) spending.
In September (most recent data), consumer spending increased by just 0.6% (seasonally adjusted), according to the Commerce Department. That follows August’s equal 0.6% increase in consumer spending, revised upward from previously reported 0.4% and negative 0.2% consumer spending in July.
For Q3 2022 as a whole, the pace of consumer spending slowed, increasing just 1.4% for the quarter and down from 2% in Q2.
For the month, consumers spent more on food, clothing, prescription medications, recreational goods, and especially motor vehicles. Likewise, price tags for housing, utilities, and transportation ran higher.
Consumer spending accounts for more than two-thirds of all US economic activity.
Unemployment and job growth
Even as the Fed is trying to pull the cord on every available parachute to slow down the economy, the current unemployment rate is surprisingly low. The latest US jobs data shows the unemployment rate fell to 3.5% through September (most current monthly data).
Low unemployment numbers contrast with a slight slowing in job growth, as the number of Americans who are currently employed (or looking for a job) fell off in September. For the month, the US economy added 263,000 new jobs, according to the Bureau of Labor Statistics, a significant drop from the 315,000 jobs created in August and 537,000 new jobs in July.
Through September (October’s job report is due out the first Friday of November), the US economy has averaged 420,000 jobs per month, down from the torrid 562,000 monthly average of job growth through 2021.
Spotlight on stats
0% to 20%
While we may lament our current fed funds rate at a range of 3% to 3.25%, that is barely even a blip on the screen compared to the all-time high.
Over the past 50 years, the federal funds rate has ranged from 0% all the way up to 20%.
In 1980, the Fed hiked rates to a mind-boggling 20% as they wrestled with double-digit inflation. The fed funds rate has hit lows of 0% twice over the last 50 years, once in 2008 as the Fed looked to revive the economy during the Great Recession, and again in 2020 in response to the economic shock of the Covid-19 pandemic.
The big news in the housing market is mortgage rates, which continue to rise in response to Fed rate hikes. According to the National Association of Realtors, the average 30-year fixed mortgage surpassed the 7% mark in late October, the highest mark for borrowers since 2001. As expected, that’s causing a glacial slowdown in the housing market, with new mortgage applications at their lowest volume since 1997.
Pending home sales were down 10.2% from August to September, the fourth straight month of declines. Pending home sales, a good measure of how many real estate transactions are underway as well as sales volume, is now at its lowest level since June of 2010 and down 31% since the same month in 2021.
However, thanks to a few years of momentum and hot price appreciation, average home sale prices are still +8.4% higher than the same month last year. Another key metric, months of available inventory, are still up 0.8 from September of 2021, but extremely low compared to historical standards.
“Money’s greatest intrinsic value – and this can’t be overstated – is its ability to give you control over your time.”
-Morgan Housel, The Psychology of Money