November 2, 2022
Good morning,
About three weeks ago, while the equity market and its psyche were making new lows, we suggested (here) that if equities could just hold on and possibly stabilize into the end of the month, we might see a few catalysts in early November that could spark a year end rally. The possible catalysts were today’s Fed meeting, Friday’s employment numbers, next week’s election, and CPI data on 11/10.
The market didn’t just stabilize in mid-October, it launched and is now up +10.4% since its 10/13 intra-day low by S&P 500 measures. Now, those 4 catalysts in 9 days will become our rally’s testing zone. Testing whether the market jumped the gun and is ahead of the Fed again. Markets have already assumed the Fed will downshift in December (not continuing +75bps rate hikes), but it is hard to see Fed chair Powell pre-commit to that at today’s news conference. The Fed is unlikely to box itself into a corner and will more likely reiterate its data dependence. Data is two of the remaining three catalysts – jobs and CPI. On the jobs front, yesterday’s JOLTS report (Job Openings and Labor Turnover Survey) and this morning’s ADP numbers (Automatic Data Processing’s Payroll Services numbers), while not perfectly correlated to Friday’s employment numbers, nevertheless point to a stubbornly tight employment environment.
The Fed and inflation have been the market’s primary focus for many months now. Just in the past few weeks, the market has jumped up +10% in the face of a pretty crummy earnings season because it may have jumped the Fed. While near term Fed moves and data releases have likely been the largest factors driving the current rally, they aren’t the only factors. This is why I think the market rally is entering its testing zone. If the market is up solely on the Fed comments and economic data releases over the next 9 days – I doubt the rally will pass the test. However, if the market is up to some extent because of what it is seeing in the way of peaked rates and economic activity 6-8 months from now, then there is every possibility that the rally will survive the next two weeks and in so doing begin to identify itself as the kind of rally that ends bear markets.
Be well,
Mike
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