Weekly Market Update: October 31, 2022

The Federal Reserve remains the elephant in the room for Wall Street. That is because investors are still worried that the central bank may have raised the benchmark short-term interest rate too much and too quickly this year in an attempt to combat inflation, and that its increasingly restrictive monetary policies may be pushing the economy toward a recession.

The economic data of late indicate that growth is slowing. True, labor market conditions remain tight, but other sectors of the economy are weakening, as elevated prices are decreasing the purchasing power of both businesses and consumers. According to the Institute for Supply Management, a trade group, manufacturing activity slowed to a 36-month low in September, and the U.S. housing market already appears to be in a recession. In mid-October, weekly mortgage applications fell to a 25-year low, as higher lending rates make purchasing a home more difficult.

For much of this year, the stock market has taken its cue from Treasuries. The rate on the benchmark 10-year government note hit 4.23% in late October, a 14-year high, and with the Fed likely to raise the short-term federal funds rate by 0.75%, to a range of 3.75%-4.00%, at its November two-day Federal Open Market Committee meeting (scheduled to begin November 1st), Treasury market yields are apt to move higher in the near term. It also is worth noting that the yield on the 10-year Treasury note has increased for 12 consecutive weeks. Historically when yields rise for that long, it makes for a difficult stretch for equities.

Meanwhile, news that China’s President Xi Jinping has won a third term and appointed an inner circle of loyalists was not greeted warmly by Wall Street. It is likely to increase state control of the world’s second-largest economy and possibly reduce foreign investment in China. It may also intensify an already hostile relationship with the U.S. government. This is not good for U.S. companies with operations in China and could potentially lead to more supply-chain disruptions down the line.

Conclusion: The stock market recovered some on a better-than-feared start to third-quarter earnings season. However, with many unanswered questions about inflation and the success of the Federal Reserve in fighting it, we still recommend erring on the side of caution. 

Source: ValueLine.com