Hawkish Fed Comments Weigh on Markets (Again)

Performance for Week Ending 11.4.2022:

The Dow Jones Industrial Average (Dow) finished down 1.40%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) lost 3.38%, the Standard & Poor’s 500 Index (S&P 500) dipped 3.35% and the Nasdaq Composite Index (NASDAQ) shed 5.65%. Sector breadth was negative with 8 of the 11 S&P sector groups closing lower. The Communication Services sector (-7.43%) was the worst performer followed by Technology (-6.49%) and Consumer Discretionary (-5.78%). The Energy sector (+2.37%) was the best performer.

*See below for Index Definitions

MARKET OBSERVATIONS: 10/31/22  – 11/4/22

Stocks indices finished the week lower as investors reacted to new market forecasts on the terminal level of benchmark interest rates. As expected, the Fed hiked rates by 75 basis points, however hawkish comments from Fed Chairman Powell at the press conference following the conclusion of the FOMC meeting outweighed dovish commentary in the after meeting statement. According to the statement "with the lags between policy and economic activity, there's a lot of uncertainty, so that we note that in determining the pace of future increases will take into account the cumulative tightening of monetary policy, as well as the lags with which monetary policy affects economic activity and inflation. The statement seemed to open the door to a dovish pivot from the Fed at its next meeting.

However, during Powell's Q&A session, he essentially rejected the idea of a near-term 'pivot'. "When they hear lags, they think about a pause," Powell said. "It's very premature, in my view, to think about or be talking about pausing our rate hike." He also indicated that while smaller rate hikes in the coming months could be warranted, the ultimate level of the benchmark Fed Funds rate will be higher than he and his colleagues had previously estimated. As a result, traders are now expecting a 50 basis point rate hike in December, with a terminal Fed Funds rate of between 5% and 5.25% by mid-year.

Payroll Report: The October Payroll report showed US employers added more jobs than expected in October while wages rose firmly, underscoring the resilience of the labor market despite the Federal Reserve’s aggressive efforts to cool it down. According to the Labor Department, nonfarm payrolls increased 261K last month following an upwardly revised 315K gain in September. The unemployment rate ticked up to 3.7% as participation edged lower, while average hourly earnings beat forecasts. The median estimate in a Bloomberg survey of economists called for a 193K advance in payrolls and for the unemployment rate to edge up to 3.6%. Despite some minor cracks in the report, the labor market has continued to hold up better than expected, and with wage growth still too hot for the Fed, there is little to suggest that officials will drop their hawkish bias any time soon.

Q3 Earnings: Despite some high profile earnings misses in recent weeks, overall earnings for the third quarter continue to trend at a better than feared pace. Through Friday, 430 members of the S&P 500 has released third quarter results with just over 70% beating expectations. With over 80 percent of the S&P 500 reporting results, aggregate earnings for this group are up 3.2%, but still slightly ahead of the expected pace of 2.2% forecasted in mid-October. The strongest results have come from Energy, Consumer Discretionary, and Real Estate.

The Week Ahead: The main focus in the week ahead will be the midterm elections on Tuesday, where control of both the House of Representatives and the Senate will be up for grabs. On the data front, the October Consumer Price Index release on Thursday will be front and center for markets following last week's Fed decision, where the latest pivot hopes were dashed during Chair Powell's press conference. According to Bloomberg, headline inflation is forecast to rise by 0.6% during the month and 7.9% on a year-over-year basis. The core rate—which excludes food and energy—is expected to rise 0.5% m/m and 6.5% y/y. Other data reports of interest include; jobless claims and the University of Michigan consumer sentiment and inflation expectation readings. Earnings season will continue to wind down with just 30 members of the S&P 500 expected to release results. It will be a busy week for Fed speakers with 8 presentations on the docket.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.