Hot Inflation Report Cements Another Rate Hike in November

Performance for Week Ending 10.14.2022:

The Dow Jones Industrial Average (Dow) finished up 1.15%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) lost 1.76%, the Standard & Poor’s 500 Index (S&P 500) fell 1.55% and the Nasdaq Composite Index (NASDAQ) shed 3.11%. Sector breadth was negative with 8 of the 11 S&P sector groups closing lower. The Consumer Discretionary sector (-4.09%) was the worst performer followed by Technology (-3.23%) and Utilities (-2.58%).

*See below for Index Definitions

MARKET OBSERVATIONS: 10/10/22  – 10/14/22

Stocks indices finished the week mixed to lower as any hopes the Fed would pivot to a more dovish stance were dashed by the recent Payroll report and the hotter than expected Consumer Price Index (CPI) data. On the latter, the Labor Department reported that consumer prices in September rose by a stronger than expected 0.4% and were up 8.2% on a year-over-year basis. The core rate--which excludes food and energy prices--rose 0.6%, well ahead of the 0.4% gain expected by economists. On a year-over-year basis core CPI was up 6.6% from 6.3% during August, marking the highest pace in 40 years. Inflation worries were fanned by the University of Michigan’s inflation expectations poll which showed that consumers expect the pace of inflation at 5.1% over the next year, up from 4.7% last month, and the first increase in seven months. Fed Chairman Powell has recently stated that the Fed is watching inflation expectations very closely and noted the importance of keeping expectations anchored. Last week’s inflation data likely cements a 75 basis point rate hike at the November 2 Fed meeting, with some investors betting the Fed could move by 100 basis points. The odds of an additional 75 basis point move at the December meeting have also ticked higher, with a 52% probability as of this writing.

Third Quarter Earnings on Tap: Q3 earnings season kicked off in earnest last week but will shift to high gear in the weeks ahead. As of Friday 35 members of the S&P 500 have reported results with nearly 69% surprising to the upside. Expectations heading into third quarter earnings season are relatively low with full quarter results expected to show earnings for the S&P 500 grew at just a 2.2% year-over-year pace (down from 9.7% growth at the end of May – so the bar has been reduced pretty sharply heading into the quarter). More importantly than the actual results will be forward guidance from company management – where they are expected to address the impact of the stronger dollar, slowing growth, elevated inflation, and higher interest rates – and how these things are expected to impact business conditions for the remainder of the year and into 2023.

The Week Ahead: Earnings season will shift to the front burner this week with 66 members of the S&P 500 scheduled to release results, including 8 members of the Dow Industrial Average amongst this group. The data calendar will feature industrial activity indicators such as Industrial Production, the Empire Manufacturing Index and the Philadelphia Fed Business Outlook. The housing market will also be in focus after last week's CPI print showed strong momentum in rent prices. The releases will include housing starts, building permits and existing home sales. It will be another busy week of Fed speak with ten presentations on the docket. On Wednesday the Fed will release its Beige Book report which will provide an update on economic conditions across the 12 Federal Reserve Districts. Outside the US, all eyes will be on China where they are set to kick-off their twice a decade Party Congress event on Sunday. Xi Jinping is expected to be reappointed as leader for a third 5-year term. The country's 5-year priorities, usually outlined during the congress, will also be in the spotlight amid the multiple growth headwinds China is currently facing.

— 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.