November 8, 2022

Nolte Notes

November 7, 2022

“If I told you once, I’ve told you a thousand times”, we are raising interest rates. Without getting too technical, the quote could have been used at the Chair Powell’s press conference when asked about future rate increases. The stock market did as expected, falling 1% ahead of the press release, rallying 2% once the release was made, then falling 3% after Powell began speaking. The volatility was unusual for a Fed Day, but the reaction was not. Many read into the press release that the Fed would likely be “resting”, keeping rates high, after the first of the year to allow their impact to be felt throughout the economy. Those reading of the tea leaves were washed away once Powell began speaking. This week we’ll get another inflation report alongside the mid-term elections and plenty of Fed speakers. It will be interesting to hear the various Fed governors talk about rate increases. They have been very united following the two prior meetings, so we’ll see if that trend continues. Oh, and the jobs reports came out Friday indicating the economy continues to create jobs. Although the pace is slowing a bit, the headline number would be a very good number outside of the pandemic period of the last two years. The economy continues to grow, giving the Fed all the reasons needed to keep the hikes coming.

Digging a bit deeper into the jobs report, the average last three-month job gains were 290,000, which is higher than nearly any three-month period going back to mid-2000. Although it is the slowest period since the pandemic lows in 2020. So, it could be argued that job growth is slowing, however in the context of history, growth remains very robust. Wage growth remains in the 5-6% range, but still below the rate of inflation. Here too, wage growth is slowing down, but due in large part to lower income workers entering the labor force. These are the ones that are struggling to keep up with inflation and are using credit cards more over the past year. Revolving credit balances are growing, even as retail sales slow. The economic recovery continues to be very split between the top and lower end wage earners. This was the same dynamic that was in place during the shutdown. It makes broad economic assessments difficult due to the impacts upon various wage earning “classes”.

Chair Powell made it abundantly clear that the Fed would be hiking rates until inflation gets under control. The bond market took the admonishment to heart and interest rates continued to rise, pushing prices lower. Now that very short-term maturities are yielding more than ten-year bonds, a recession “call” is being made by the markets. Each recession has been preceded by this “inversion” of the yield curve. It would argue too, that investors should begin buying very long-term bonds as a recession would “force” the Fed to begin cutting rates to help the economy. It may indeed be different this time as the Fed is on an inflation killing mission that could keep the rate inversion in place much longer than expected. Going back to the inflation years of the ‘70s/’80s, the curve was negative for most of a three-year period. If today is like then, there are many more months of yield curve inversion ahead.

The big earnings miss’ by many technology stocks over the last few weeks has investors beginning to question whether growth stocks are worth the volatility and lowered expectations. Since the end of September, the “value” portion of the SP500 is up roughly 10%, while the growth portion is down a smidge. It is one of the largest differences in such a short time going back to 2000, the last time value had a long-term advantage over growth. The outperformance extends to the smaller portions of the market as well, although not as disparate as the large cap spread. This week also saw international stocks do well in large part helped by China’s 12% gain. The international market remains a very inexpensive portion of the world, albeit until the dollar weakens against other currencies, it remains a love/hate relationship for investors. Finally, one area that has picked up again after a six-month hiatus are commodities. The broad index is at its highest level in two months and could be trouble for inflation and additional rate increases if the recent trend continues.

For all the wild swings in the markets, the market is still higher than mid-year. History is also on the side of the bulls, as post-election returns tend to be very good vs. the two years from the presidential elections and mid-terms. Interest rates and the dollar will be the calling the shots for stocks. Any easing of their recent increases will be welcomed by investors.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.

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