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November 1, 2022

What to watch for in November – Will the news calendar set up a possible rally?

Investment Committee

Since the market’s recent low on October 12, the S&P 500 has risen more than 8% over the past 13 trading days through yesterday’s close. Even as the Dow Jones Industrial Average secured its best October performance ever (and the best month since 1976) on Monday, the first 10 days of November promise to deliver a whirlwind of news activity that could push the market even higher if the right cards fall into place.

The four calendar dates we are watching include:

  • November 2 – Fed announces latest interest rate hike and offers forward guidance
  • November 4 – Latest employment report
  • November 8 – Midterm election results
  • November 10 – Latest inflation report (CPI)

The Fed announces its rate decision this Wednesday, and a fourth straight hike of 75 basis points (bps) is all but guaranteed. Attention will remain squarely focused on the post-meeting news conference when Chairman Powell will offer some forward-looking guidance and is likely to say the Fed will remain data dependent. Fighting inflation is the Fed’s top priority, and until they see some more progress, rates will continue to go higher (markets are pricing in another 100 bps of hikes after this week until 5% is reached in mid-2023).

This Friday brings with it the latest jobs report. As the labor force participation rate has edged lower, unemployment remains very low at 3.5%. Nonfarm payroll growth has been strong and steady for most of this year, and job gains are expected to come in around 200,000. But, all eyes will be on whether faster wage inflation has begun to subside, possibly as a prelude to fewer job gains in the months ahead. This would demonstrate that the Fed’s hikes are beginning to cool economic activity.

Election Day on Tuesday, November 8, brings with it a degree of clarity of the political make-up of Congress over the next few years. While the political outcome is not guaranteed – things are too close to call, and predicting elections is not our forte – we would bring attention to the fact that markets often rally after midterm elections as uncertainty is removed. One other thing to keep in mind – markets do well regardless of who’s in power (see chart), and oftentimes political gridlock is the best scenario because investors and businesses are more likely to move forward with plans when things seem less likely to change. Since 1934, markets have delivered positive results in the 12 months following midterm elections, averaging a 22% gain over that time period.

The last key piece of data will be the first inflation report following the Fed meeting on November 10. Investors will be closely looking at the pace of month-to-month changes since it indicates whether inflation may be accelerating or decelerating. The core figure, which excludes energy and food prices, is also important because it represents “sticky” inflation on which many consumers base their assumptions for future inflation. While expectations for future inflation remain fairly well anchored, the Fed would like to see progress in bringing actual levels lower and could use some help from a slower inflation pace in rent, food, and healthcare categories to move the needle.

Given the pessimism that has recently made itself present in financial markets, just a few positive data points with any of these news events might be enough to send the market higher. However, despite the deep slump in stocks thus far in 2022, we’d like to remind investors that the market is still not materially cheap. Conversely, investor prospects appear much more attractive compared to the beginning of the year. Whether this quarter’s rally will spill over into 2023 depends a lot on whether inflation can subside enough to give the Fed confidence to hold rates at these elevated levels without additional tightening and whether the economic impact of tighter financial conditions is too much for companies to bear.

As for now, while investors are seeing their patience tested in the face of a trifecta of negative returns, high inflation, and elevated volatility, the JNBA Investment Committee has become cautiously optimistic on stocks over the medium term. Valuations have pulled back to their longer-term averages, and all else being equal, lower valuations increase the probability of more attractive forward-looking returns. While we are not calling the bottom and still think the next few months could be bumpy as earnings estimates possibly decline in the face of a recession, investors willing to embrace steady patience in the near term are likely to reap higher returns thanks to the material pullback in both stock and bond markets.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.

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