Week in Review: The Rally Stalls [Nov. 4-22]

October came to an end on Monday and the Dow Jones Industrial Average logged its best monthly performance since 1976 with a gain of 14.0%. But the stock market was due for a period of consolidation after a big run, which picked up steam as the week progressed.

The major averages clung to a fairly narrow trading range in the first half of the week as market participants played a waiting game ahead of the FOMC policy decision on Wednesday, and Fed Chair Powell’s subsequent press conference.

The big run in October was partially predicated on the notion that the Fed might soften its approach after the November meeting. The following line in the policy directive from Wednesday added fuel to that notion:

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Market participants quickly adjusted to the reality that the Fed is apt to raise rates higher than expected for longer than expected. Fed Chair Powell said at his press conference, “When (people) hear lags, they think about a pause. It’s very premature in my view to be thinking about or talking about pausing our rate hike. We have a ways to go. We need ongoing rate hikes to get to that level of restrictive. We don’t know where that exactly is.”

Mr. Powell was also struck by how resilient the labor market has been, noting that the unemployment rate is still sitting near a 50-year low and that wage inflation, while flattening out, is still well above the level that would be consistent over time with 2.0% inflation.

The October Employment Report reflected a labor market that isn’t showing enough weakness yet to convince the Fed that it can stop raising the target range for the fed funds rate. That point notwithstanding, the October employment situation was more consistent with achieving a soft landing for the economy than a hard landing.

Other economic data of note this week included the ISM Manufacturing Index for October. That report reflected a moderation in manufacturing activity that borders on contractionary territory, which hasn’t been seen since the pandemic-led contractions in April and May 2020. The ISM Non-Manufacturing Index for October showed that business activity for the non-manufacturing sector, which comprises the largest swath of U.S. economic activity, softened in October at the same time price pressures remained elevated.

Treasury yields were on the rise in anticipation of Wednesday’s FOMC decision, but yields really moved up after that. The 2-yr Treasury note yield rose 25 basis points this week to 4.67%. The 10-yr note yield rose 15 basis points this week to 4.16%.

Other central banks made headlines this week aside from the Fed. European Central Bank (ECB) President Lagarde said that recession risk in the eurozone has increased, and that inflation is too high. ECB policymaker Nagel said that the ECB has a long way to go on rate hikes and that the central bank should begin reducing its bond portfolio at the start of 2023. The Reserve Bank of Australia raised its cash rate by 25 bps to 2.85%, as expected. The Norges Bank raised its key rate by 25 bps to 2.50% and the Bank of England raised its key rate by 75 basis points to 3.00%.

Market participants received earnings reports from over one third of the companies in the S&P 500 this week. Per usual, there were some big winners and big losers, yet macro factors tended to overshadow the individual earnings reports.

Growth stocks struggled this week, which were afflicted by rising interest rates, weak guidance in a number of cases, and the shift out of the mega-cap darlings. The Vanguard Mega Cap Growth ETF (MGK) fell 6.8% this week. Apple (AAPL) and Amazon.com (AMZN) were among the losing standouts for the group.

Meanwhile, Chinese stocks were a pocket of strength this week as speculation circulated that China will ultimately relax its zero-COVID policy. JD.com (JD) and Alibaba (BABA) were among the biggest winners for Chinese stocks.

Energy stocks were another pocket of strength in the market. The S&P 500 energy sector closed with the biggest weekly gain, up 2.4%, as WTI crude oil futures rose 5.4% to $92.60/bbl. Only two other sectors out of the 11 total were able to squeeze out a gain on the week. Industrials rose 0.4% and materials rose 0.9%.

The dollar had a whipsaw week. The U.S. Dollar Index was inching higher all week until taking a sharp turn lower Friday as other major currencies registered big gains against the greenback (EUR/USD +2.1% to 0.9960). The U.S. Dollar Index closed the week unchanged.

Source: Briefing Investor