This Week in Review:
Markets Move On From Midterm Morass
A bitcoin bloodbath and yet-to-be-determined majorities on Capitol Hill stalled a three-day rally on Wall Street this week. But a positive (lower) inflation reading on Thursday put some wind back in the markets’ sails—the S&P 500 closed up over 5.5% and the NASDAQ Composite rallied more than 7%.
THIS WEEK:
- Chart of the Week: It’s the Most Wonderful Time of the Year
- Looking Ahead
A bitcoin bloodbath and yet-to-be-determined majorities on Capitol Hill stalled a three-day rally on Wall Street this week. But a positive (lower) inflation reading on Thursday put some wind back in the markets’ sails—the S&P 500 closed up over 5.5% and the NASDAQ Composite rallied more than 7%.
Despite a headline inflation reading of 7.7% year-over-year in October, the decline from the 8.2% annual rate last month was a bullish sign. The report opens the door for Federal Reserve policymakers to slow the pace of their interest-rate hikes. Based on bets in the futures markets, traders now expect the Fed to hike the fed funds rate by just 0.50% at its next meeting in December after four prior 0.75% raises, suggesting the battle against higher prices is beginning to show results.
- Crypto was back in the headlines for all the wrong reasons this week as speculators sparked a “bank run” on leading crypto exchange FTX, resulting in a liquidity crunch that sent the company in search of a bailout from competitor Binance. The deal promptly fell through, causing further turmoil with bitcoin falling to a two-year low, down 25% in just three days.
- The inflation news and expectations for smaller Fed interest-rate hikes rallied technology stocks on Thursday, though tech took it on the chin earlier in the week.
- Online retail colossus Amazon became the first public company to earn the unhappy distinction of a $1 trillion drop in market value as traders sold on growing disappointment with earnings across the tech sector.
- Meta (Facebook) announced plans to lay off more than 11,000 employees amid slumping ad sales and an as-yet-unprofitable big bet on its expansive virtual reality “metaverse.”
- TikTok, crowned “the world’s most valuable startup” by Bloomberg, cut its 2022 ad revenue expectations by $2 billion, citing a global pullback in marketing spending.
- Despite the highly hyped tech slump, 69% of S&P 500 companies exceeded earnings-per-share expectations during the current third-quarter reporting season, with fewer than 50 companies left to report. On the flip side, estimates for fourth-quarter earnings are down nearly 5% from a month ago. Lower inflation might catalyze increased holiday shopping, but it’s too early to speculate.
Chart of the Week: It’s the Most Wonderful Time of the Year
Equity markets continue to be unforgiving, and recent sentiment polls point to a bleak outlook for the rest of the year. But is this market truly doomed? Or might we have some good news to celebrate as we ring out 2022? We looked at some historical returns to find out.
Let’s start with holiday season. You’ve probably heard the old investing cliché “Sell in May and go away.” The idea is that positive returns tend to be concentrated in the first half of the year, declines in the latter. But a look at the data in the chart below reveals some reasons to be optimistic about the year’s final months.
Looking at almost 35 years of historical returns of the S&P 500 from the worst half of the year and the best half of the year, the return differential is noteworthy. Owning the S&P 500 from November to April provided nearly five times the return that owning the other six months of the year produced.
What’s behind the anomaly? Santa’s little helpers, in part: Holiday spending and employment surge in November and December, creating positive economic data that may help push markets higher. Similarly, the economy often experiences a drop in productivity due to summer vacations slowing markets from May through October.
Of course, happy holidays aren’t the only regularly recurring feature of the year’s final months. U.S. politics also takes its turn in the spotlight every other November, though elections tend to bring a lot more storm and strife than good cheer, whatever side of the aisle you’re on.
There is, however, a silver lining to be found on the other side of Election Day. Midterm years like 2022 tend to provide the worst market returns in a four-year presidential cycle. The year following? Quite the opposite. On average, the third year of a presidential cycle historically offers a 13.5% return—more than double any other year in the cycle.
Whatever the reason, after a brutal year in the marketplace, we look to market seasonality to bring some holiday cheer heading into the final stretch of 2022.
Looking Ahead
Next week brings helpful reads on inflation, manufacturing, household debt, retail sales, homebuilding, housing starts, existing home sales and leading economic indicators.
If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or info@polariswealth.com.
Please note: This update was prepared on Friday, November 11, 2022, prior to the market’s close.
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