Key Events: The Federal Reserve slammed the door on the market’s optimism
Following the Fed’s announced rate hike, Fed Governor Powell slammed the door on the market’s hopes for a ‘pivot’ to slower rate hikes, promising to continue raising rates until inflation is under control.
The week saw mixed data on the employment front: October employment gains, as reported by the labor department, were better than expected. During the week, however, several companies announced major layoffs, including Twitter (50% of workforce), Lyft (13%), Stripe (14%), and Opendoor (18%). This follows October layoffs from Zillow, Phillips, GE, and Peloton (their fourth round of layoffs in 2022). The Federal Reserve may be getting the slowdown they desire.
Market Review: Readjusting to the Fed’s promise
The market did not like the hawkish tone of the Fed Governor’s speech. The S&P lost 3.3% on the week, although mid and small sized companies lost less. Losses were concentrated in the US stock markets, as reports that China may ease Covid lockdowns drove emerging markets higher.
Bonds lost modest amounts throughout the week as investors adjusted to the likelihood of a higher stopping point for Federal Reserve rate hikes and higher likelihood of recession.
Outlook: Earnings season and more volatility
The Fed made it clear they are not done with the inflation fight. We are likely to experience more volatility while policy is uncertain, and the market will parse each piece of economic data.
In the chart below we show the S&P 500 for the six months leading up to the mid-terms and the year following. The instances where the incumbent president lost control of Congress are highlighted in blue, and 2022 is in orange. There does not seem to be a significant difference in returns based on the mid-terms, but we highlight that the third year of the presidential cycle is often the best year. Maintain discipline on election night, just like every other night!
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