Fed Pours Cold Water On Equity Rally
The markets got a bit of a shock last week as Fed Chairman Powell doused market hopes for a rate slowdown. The big news last week was that Fed Chairman Powell ended any thoughts of the Fed slowing the pace of rates as he stated, “pausing is not something we're thinking about.”
Equity markets sold off on the Fed’s announcement Wednesday, but did manage to post a positive return on Friday. What probably spooked markets more than the Chairman spelling the rate slowdown talk, was the idea floated by Mr. Powell that rising rates could extend into March of next year instead of ending in February. Giving the Fed room to raise rates was the strong Jobs Report last week that showed 261,000 jobs added, which was more than expected. In fact, the jobs lost during COVID have now been nearly replaced. And yet, the Leisure & Hospitality industry has still not recovered all jobs lost during COVID. There still could be some positive surprises in future Jobs Reports as we enter the holiday season.
With 85% of S&P 500 companies having already reported 3rd quarter earnings, 70% have reported above earnings expectations (below the 5-year average) and 71% have reported above revenue expectations (above the 5-year average).
Tech stocks have been reeling of late as some of the key members of FAAMG have under-performed earnings and provided poor forward guidance. With that as a backdrop, now we turn to Mid-term Elections this week. We would caution against drawing too many conclusions from election night. Short-term volatility in the markets may result if clear winners aren’t declared that evening. As we’ve pointed out of recent, equity returns have historically been positive 6-12 months following Mid-term Elections. In fact, the six-month period of November to April during years where a Mid-term Election occurs are among the strongest six-month periods for equities (+14.5% on average) going back to 1945. If we do get a stalemate in D.C. (Dem White House - GOP Congress), markets typically respond well to divided government. Of the three scenarios - Dem control, GOP control, or Divided control - divided government occurs 61% of the time. During those periods, equities average +7.9% return.
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