Halloween is a scary time, and the stock market has experienced a frightening 2022 as well. If you turn on the television or read the news, you may think Armageddon has arrived, the last battle of biblical proportion between good and evil. Fortunately, reality is often less dire than the headlines make it appear. Given the horrific -19% decline in the stock market (S&P 500 index) this year, arguably much of the current and future dreadful news is already expected and discounted into today’s stock market prices. So, perhaps, the end of the world is not upon us, and the sentiment is shifting from “Armageddon” to “time to get in!” The soaring +4,007 point increase (+14%) in the Dow Jones Industrial Average this month, the best month since 1976, may be an indication of changing investor attitudes.
Q3 2022 hedge fund letters, conferences and more
We may not be completely out of the woods just yet, however a lot of the bad cat news is arguably out of the bag. For example, the Federal Reserve has already been hiking interest rates with reckless abandon since March, and this week another increase of 0.75% to roughly 4.00% is widely expected. This move should get us much closer to a Fed “pause” or “pivot”, which could soon turn the perception of a half-empty economic glass into a half-full one?
Inflation has also been running wild for months, but many indicators have shown price levels peaking or declining (i.e., commodities, housing, autos, transportation costs, etc.). Mortgage rates that have more than doubled this year to 7.08% (see chart below) are contributing to declines in home price growth.
High mortgages and high home prices have cooled the white-hot housing market because affordability has been reduced, thereby forcing rental rates to soar. And as a result, stubbornly high rents have been a major factor contributing to persistently high inflation in recent months. If home prices continue to decline (month-to-month) as shown below, this should provide some much-needed relief to rental prices, and ultimately inflation.
And although there does not appear to be a clear end in sight to the Russia-Ukraine war, Ukraine’s recently successful land recapture accomplishments from the Russians could pressure both parties to settle at the negotiation table.
Sweet October Treats
Stock market investors received a sugar high this month with sweet index gains of +8.0% and +14.0% for the S&P 500 and Dow Jones, respectively. While it has been mostly gloomy in 2022, some of the sunshine beaming through the clouds this month came in the form of better-than-expected GDP economic figures that measure the health of the overall economy. Rather than show an impending recession, the freshest 3rd quarter data shows the economy growing at a very respectable +2.6% annualized rate after falling -0.6% in the 2nd quarter (see chart below).
And contrary to many of the doomsday-er recession forecasting mongers, corporate profits have remained tenaciously high near record levels (see chart below), with no sign of collapsing as in 2020 (COVID) or 2008 (Financial Crisis). That doesn’t mean profits can’t contract further, because the dampening effect of higher interest rates could take some time before working its way through the economic python like a pig.
One month does not make a trend, but the largest one month gain in 46 years may be evidence that the world is actually not coming to an end anytime soon. Therefore, it might be a great time to “get in” before booking your fresh trip to “Armageddon”.
Wade W. Slome, CFA, CFP®
