All major equity sectors except for one were higher last week. The most significant takeaway from last week was the 3rd quarter GDP report that showed the economy
grew 2.6%, which was above expectations and signified that the “technical” recession from the 1st & 2nd quarters is now over. Corporate earnings were solid overall last week, except for Technology and Communications Services. This helped lift Cyclicals (Basic Materials, Financials, & Real Estate) and Defensives (Utilities, Consumer Defensives, & Healthcare) last week.
Inflation appears to have peaked and another sign of this is the GDP Price Index that was released last week.
The GDP Price Index measures the price of goods and services included in the GDP measurement. The Index declined from +9.1% in Q2 to +4.1% in Q3. That doesn’t mean that inflation is headed back to normal just yet, but it likely means the peak has been reached. In addition, gas prices have dropped 5% over the last 2 and a half weeks. The Baltic Dry Index, a measure of shipping costs, has declined 71% since peaking in October of 2021.
All eyes will be on the Fed this week, as futures show an 84% probability of a 75 basis point hike on Wednesday.
However, the market will be parsing Powell’s language on Wednesday. If he forcefully pushes back on recent dovish statements, markets will react poorly. If not, higher equity prices could be in our future. The Mid-term Election boost equities typically see, plus November being the 3rd strongest month for equity inflows for mutual funds and ETFs, means the rally could sustain. What is of concern going into next year is the potential for a "double-dip" recession. The inversion of the 10-year Treasury Yield and the 3-month T-Bill Yield has historically pointed to recession. On average, the inversion of these two yields has been 14 months prior to a recession beginning, with the longest lead time being 23 months prior to the 2008 Recession.
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