The October Consumer Price Index (CPI), released 11/10, came in lower at 0.4% for the month versus the consensus of 0.6%. The markets responded by rallying the S&P 500 a whopping 5.5% to the upside that same day (something highly welcomed by portfolio managers and financial advisors like us). Had the inflation report surprised higher than expected, the S&P 500 could have easily gone the other way – thankfully, it didn’t.
The Federal Reserve, however, is looking for a trend in lower inflation rates before they are ready to “pause” interest rate hikes and “pivot” to lower rates. At his last press conference, the Chairman of the Federal Reserve, Jeremy Powell, indicated that it was too early to discuss pausing rate hikes. Nonetheless, if the pace of inflation keeps cooling, he may be more likely to pause rate hikes sooner rather than later, and eventually, return them lower to a more recent normal.
This doesn’t mean that we are out of the woods yet, but at least the daylight through the trees seems to be getting brighter.
There are real reasons to be optimistic. There are prominent economists, such as Professor Jeremy Siegel from the Wharton School of UPenn, that think the Federal Reserve should stop raising rates now because inflation data is set up for a steep slowdown soon (Siegel, 2022). Federal Reserve Vice Chair Lael Brainard of the Federal Reserve is stating that the pace of rate increases should slow to observe how the economy is reacting. This is in stark contrast to a few months ago when economists were begging the Fed to raise rates dramatically (Timiraos, 2022).
As we’ve discussed most of this year, there has been a high correlation between rising interest rates, the strong dollar, and the S&P 500 (the market) falling. The higher the Fed moved rates, the stronger the dollar got, which led to the market moving lower. We’ve always said that soon after the dollar falls, the market will start to increase. And just like that, the CPI (inflation) was less than expected, the dollar fell, and the market went up.
We’ve clawed back quite a way from the October low. As of this writing, the S&P 500 is positive by approximately 12% from October 12th. At this point, we are cautiously optimistic for the rest of the year; however, we wouldn’t rule out making portfolios a little more conservative in the near future if the market continues to increase at an unsustainable pace. While the economy still seems to be resilient, there are many uncertainties ahead of us and the market will likely still be volatile.
Everyone here at Paragon Wealth Management wishes you and your family a wonderful Thanksgiving holiday. As crazy as life may get, this time of year is a perfect time to stop and be thankful for all we have, and we are sincerely thankful for your support and trust in us.
Siegel, P. J. (2022, November 14). Weekly Siegel Commentary. Retrieved from WisdomTree: https://resources.wisdomtree.com/weekly-siegel-commentary/
Timiraos, N. (2022, November 14). Fed’s Brainard Says Rate-Rise Pace Can Slow Soon. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/feds-brainard-says-rate-rise-pace-can-slow-soon-11668445354?mod=economy_lead_pos1
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