AMERIPRISE FINANCIAL, INC.
U.S. equity markets roared higher last week following an October Consumer Price Index (CPI) print that came in weaker than expected. The likelihood of a divided government over the next two years also helped propel stock prices higher. Last week, equities essentially erased their prior week's declines, as the S&P 500 Index advanced +5.9% and the NASDAQ Composite soared +8.1%. The Dow Jones Industrials Average and Russell 2000 Index also experienced strong gains on the week, rising +4.2% and +4.6%, respectively. Notably, the S&P 500 Index moved back above its 50-day and 100-day moving averages and even peaked above the 4,000 level at one point on Friday before settling at 3,993 - its highest level since mid-September.
Growth (+8.3%) outpaced Value (+3.9%) last week, with Technology (+10.0%), Communication Services (+9.2%), and Materials (+7.7%) the sector winners. Inside fixed income, U.S. Treasury prices rallied as yields fell, with the 10-year U.S. Treasury yield closing the week firmly below 4.00%, ending Friday at 3.82%. The U.S. Dollar Index (down 4.1%) weakened materially, particularly against the Japanese yen, notching its worst week since March 2020. Gold (+5.5%) saw its best week in more than two and a half years, while West Texas Intermediate (WT) crude settled lower by 3.9%.
Investors Cheered a Lower-than-Expected Inflation Report
Thursday's market reaction to the highly anticipated October CPI report drove much of last week's price action. Although investors were still in the process of discounting the makeup of Congress after Tuesday's U.S. mid-term election, the weaker-than-expected CPI report quickly reminded market participants that inflation remains the key driver of stock prices.
The headline October Consumer Price Index (CPI) showed the smallest year-over-year gain since January. Headline CPI fell to +7.7% year-over-year last month, down from the +8.2% pace recorded in September and off from June's four-decade high of +9.1%.
In addition, core CPI (which excludes food and energy) fell to +6.3% y/y in October, down from the +6.6% level recorded in September, the highest level since 1982. Notably, consumer prices held flat or moderated on a month-over-month basis, with broad declines seen across apparel, medical prices, used vehicles, and airfares. The CPI report also showed price moderation in owners' equivalent rent, which has, thus far, proven a stickier component of inflation. And while higher gasoline prices in October added to inflation pressures, services inflation (ex-energy) fell to +0.5% m/m from +0.8% in September.
Bottom line: Inflation pressures in October moderated more than expected, and investors breathed a heavy sigh of relief last Thursday that the data wasn't worse than expected for a change. As a result, the S&P 500 and NASDAQ posted their best single day of performance since April 2020, and when stocks began to recover from the COVID-19 bear market.
Treasuries, the S&P 500 and the Dollar Index Posted Notable Moves; One Month of Inflation Data Does Not Make a Trend
Notably, the 10-year U.S. Treasury yield sank more than 30 basis points on Thursday, as interest rates across the Treasury curve fell in response to weaker inflation pressures last month. As Bespoke Investment Group recently noted, last Thursday's moves in the market were "extreme." According to Bespoke data, Thursday's move in the 10-year U.S. Treasury yield was the 17th most extreme downside move going back to 1980. Also, the S&P 500 logged its 15th largest one-day rally going back to 1980, while Thursday's decline in the U.S. Dollar Index (typically a safe-haven play during market stress) saw its 9th sharpest spike lower, also dating back to 1980. The monstrous rallies and declines across stocks and other assets last Thursday clearly indicate just how intertwined inflation data and stock prices are at the moment.
Unfortunately, one month of inflation data does not make a trend, nor does it suggest the Federal Reserve is likely to declare its mission accomplished any time soon. The CME FedWatch Tool shows odds of a 75-basis point fed funds rate hike in December at under 20% currently, down from the roughly 45% chance before the CPI release. And while we support a smaller 50 basis point move from the Federal Reserve next month, investors should focus their attention on the "terminal rate," or the fed funds rate level at which the central bank stops hiking. Currently, the fed funds target rate stands at 3.75% - 4.00%, which has rocketed higher this year as the Fed works to stamp out inflation. However, we believe the Fed's terminal rate remains somewhere above 5.0%, suggesting Fed Chair Jerome Powell and company have more work to do to help force inflation down to more tolerable levels. That means investors may have to continue grappling with stock volatility next year as incoming inflation data and the Fed's rate guidance/actions keep markets on edge.
Midterm Elections Show Gridlock in Washington is Likely, Which Tends to be Positive for Stocks
Turning to the mid-term election results, as it currently stands, Republicans look poised to capture the House of Representatives, while Democrats will maintain their narrow lead in the Senate. Democratic control in the Senate will allow the White House to have more sway on domestic and foreign spending issues and allow Democrats to oversee the confirmation of executive branch appointments and judges. However, gridlock is likely the main thrust of the legislative agenda over the next two years. Importantly, tax changes and fiscal spending will likely be limited, and net-net, Washington gridlock tends to be a positive for stocks. But expect a divided Congress next year to lead to increased battles over the debt ceiling and challenge legislatures' ability to agree on a budget. Such political discourse could increase market volatility should a stalemate on these items lead to a government shutdown or, worse, a U.S. credit downgrade. On the plus side, the S&P 500 Index historically sees improved near-term performance in the months following the mid-term election versus in the months before the election, no matter the result. Simply, markets respond better to certainty than they do uncertainty, as investors can undoubtedly sympathize with this year. And while stocks can breathe a sigh of relief from a result that creates a more divided government, growing global recession concerns, high inflation, and tighter central bank policies may limit buying enthusiasm as long as other macro conditions remain a headwind.
In other items that drove market direction last week, several news reports pointed to China "optimizing" its COVID-19 policies, which include shortened quarantine periods, less intrusive contact tracing, and increased at-home monitoring/quarantines. Russia also ordered the withdrawal of its forces in Kherson last week amid Ukraine troops advancing. And while each item may not amount to much in terms of changing the overall global narrative, hope around China reopening more fully and the potential for some diplomacy in the Ukraine war helped ease geopolitical tensions last week. Finally, the collapse of the $32 billion FTX crypto empire has contributed to knocking more than $125 billion in market capitalization from bitcoin and other tokens, though so far, the fallout has not spilled over into other areas outside of crypto.
Coming up this Week: Economic Reports, the G20 Summit and Final Q3 Earnings
Looking ahead, investors will have several key economic reports to absorb this week. October Producer Price Inflation drops on Tuesday, and October retail sales will hit the market's radar on Wednesday. Home data will also come into focus this week, with October housing starts reported on Thursday and existing home sales released on Friday.
The G20 summit in Bali on Tuesday and Wednesday will also receive some attention. However, Monday's first face-to-face meeting between President Biden and China President Xi Jinping will likely grab all the headlines. According to the White House last week, the two sides will discuss efforts to maintain and deepen lines of communication, manage competition, and work together where both countries' interests align. However, Reuters noted that Biden's priority is also on setting a floor to prevent further deterioration in relations. In addition, Bloomberg highlighted the U.S. president has vowed to make "no fundamental concessions" to Xi.
Finally, fifteen S&P 500 companies (including three Dow 30 components) are scheduled to report third quarter results, essentially ending the Q3 earnings season. With roughly 91% of Q3'22 S&P 500 profit reports complete, blended earnings per share (EPS) growth is higher by +2.2% y/y on revenue growth of +10.6%. Yet, actual third quarter EPS growth looks like it will finish lower than the +2.8% expected at the end of September and come in at its slowest pace in two years. Current analyst estimates anticipate S&P 500 EPS to drop 1.1% for the fourth quarter, which would be the first overall decline in profit growth since Q3'20.
Important Disclosures:
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market's views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed's "Dot Plot," which reflects FOMC members' expectations for the Fed target rate over time.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
Growth (+8.3%) outpaced Value (+3.9%) last week, with Technology (+10.0%), Communication Services (+9.2%), and Materials (+7.7%) the sector winners. Inside fixed income, U.S. Treasury prices rallied as yields fell, with the 10-year U.S. Treasury yield closing the week firmly below 4.00%, ending Friday at 3.82%. The U.S. Dollar Index (down 4.1%) weakened materially, particularly against the Japanese yen, notching its worst week since March 2020. Gold (+5.5%) saw its best week in more than two and a half years, while West Texas Intermediate (WT) crude settled lower by 3.9%.
Investors Cheered a Lower-than-Expected Inflation Report
Thursday's market reaction to the highly anticipated October CPI report drove much of last week's price action. Although investors were still in the process of discounting the makeup of Congress after Tuesday's U.S. mid-term election, the weaker-than-expected CPI report quickly reminded market participants that inflation remains the key driver of stock prices.
The headline October Consumer Price Index (CPI) showed the smallest year-over-year gain since January. Headline CPI fell to +7.7% year-over-year last month, down from the +8.2% pace recorded in September and off from June's four-decade high of +9.1%.
In addition, core CPI (which excludes food and energy) fell to +6.3% y/y in October, down from the +6.6% level recorded in September, the highest level since 1982. Notably, consumer prices held flat or moderated on a month-over-month basis, with broad declines seen across apparel, medical prices, used vehicles, and airfares. The CPI report also showed price moderation in owners' equivalent rent, which has, thus far, proven a stickier component of inflation. And while higher gasoline prices in October added to inflation pressures, services inflation (ex-energy) fell to +0.5% m/m from +0.8% in September.
Bottom line: Inflation pressures in October moderated more than expected, and investors breathed a heavy sigh of relief last Thursday that the data wasn't worse than expected for a change. As a result, the S&P 500 and NASDAQ posted their best single day of performance since April 2020, and when stocks began to recover from the COVID-19 bear market.
Treasuries, the S&P 500 and the Dollar Index Posted Notable Moves; One Month of Inflation Data Does Not Make a Trend
Notably, the 10-year U.S. Treasury yield sank more than 30 basis points on Thursday, as interest rates across the Treasury curve fell in response to weaker inflation pressures last month. As Bespoke Investment Group recently noted, last Thursday's moves in the market were "extreme." According to Bespoke data, Thursday's move in the 10-year U.S. Treasury yield was the 17th most extreme downside move going back to 1980. Also, the S&P 500 logged its 15th largest one-day rally going back to 1980, while Thursday's decline in the U.S. Dollar Index (typically a safe-haven play during market stress) saw its 9th sharpest spike lower, also dating back to 1980. The monstrous rallies and declines across stocks and other assets last Thursday clearly indicate just how intertwined inflation data and stock prices are at the moment.
Unfortunately, one month of inflation data does not make a trend, nor does it suggest the Federal Reserve is likely to declare its mission accomplished any time soon. The CME FedWatch Tool shows odds of a 75-basis point fed funds rate hike in December at under 20% currently, down from the roughly 45% chance before the CPI release. And while we support a smaller 50 basis point move from the Federal Reserve next month, investors should focus their attention on the "terminal rate," or the fed funds rate level at which the central bank stops hiking. Currently, the fed funds target rate stands at 3.75% - 4.00%, which has rocketed higher this year as the Fed works to stamp out inflation. However, we believe the Fed's terminal rate remains somewhere above 5.0%, suggesting Fed Chair Jerome Powell and company have more work to do to help force inflation down to more tolerable levels. That means investors may have to continue grappling with stock volatility next year as incoming inflation data and the Fed's rate guidance/actions keep markets on edge.
Midterm Elections Show Gridlock in Washington is Likely, Which Tends to be Positive for Stocks
Turning to the mid-term election results, as it currently stands, Republicans look poised to capture the House of Representatives, while Democrats will maintain their narrow lead in the Senate. Democratic control in the Senate will allow the White House to have more sway on domestic and foreign spending issues and allow Democrats to oversee the confirmation of executive branch appointments and judges. However, gridlock is likely the main thrust of the legislative agenda over the next two years. Importantly, tax changes and fiscal spending will likely be limited, and net-net, Washington gridlock tends to be a positive for stocks. But expect a divided Congress next year to lead to increased battles over the debt ceiling and challenge legislatures' ability to agree on a budget. Such political discourse could increase market volatility should a stalemate on these items lead to a government shutdown or, worse, a U.S. credit downgrade. On the plus side, the S&P 500 Index historically sees improved near-term performance in the months following the mid-term election versus in the months before the election, no matter the result. Simply, markets respond better to certainty than they do uncertainty, as investors can undoubtedly sympathize with this year. And while stocks can breathe a sigh of relief from a result that creates a more divided government, growing global recession concerns, high inflation, and tighter central bank policies may limit buying enthusiasm as long as other macro conditions remain a headwind.
In other items that drove market direction last week, several news reports pointed to China "optimizing" its COVID-19 policies, which include shortened quarantine periods, less intrusive contact tracing, and increased at-home monitoring/quarantines. Russia also ordered the withdrawal of its forces in Kherson last week amid Ukraine troops advancing. And while each item may not amount to much in terms of changing the overall global narrative, hope around China reopening more fully and the potential for some diplomacy in the Ukraine war helped ease geopolitical tensions last week. Finally, the collapse of the $32 billion FTX crypto empire has contributed to knocking more than $125 billion in market capitalization from bitcoin and other tokens, though so far, the fallout has not spilled over into other areas outside of crypto.
Coming up this Week: Economic Reports, the G20 Summit and Final Q3 Earnings
Looking ahead, investors will have several key economic reports to absorb this week. October Producer Price Inflation drops on Tuesday, and October retail sales will hit the market's radar on Wednesday. Home data will also come into focus this week, with October housing starts reported on Thursday and existing home sales released on Friday.
The G20 summit in Bali on Tuesday and Wednesday will also receive some attention. However, Monday's first face-to-face meeting between President Biden and China President Xi Jinping will likely grab all the headlines. According to the White House last week, the two sides will discuss efforts to maintain and deepen lines of communication, manage competition, and work together where both countries' interests align. However, Reuters noted that Biden's priority is also on setting a floor to prevent further deterioration in relations. In addition, Bloomberg highlighted the U.S. president has vowed to make "no fundamental concessions" to Xi.
Finally, fifteen S&P 500 companies (including three Dow 30 components) are scheduled to report third quarter results, essentially ending the Q3 earnings season. With roughly 91% of Q3'22 S&P 500 profit reports complete, blended earnings per share (EPS) growth is higher by +2.2% y/y on revenue growth of +10.6%. Yet, actual third quarter EPS growth looks like it will finish lower than the +2.8% expected at the end of September and come in at its slowest pace in two years. Current analyst estimates anticipate S&P 500 EPS to drop 1.1% for the fourth quarter, which would be the first overall decline in profit growth since Q3'20.
Important Disclosures:
Sources: FactSet and Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
The fund's investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor's 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market's views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed's "Dot Plot," which reflects FOMC members' expectations for the Fed target rate over time.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
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Ameriprise Financial Inc. published this content on 14 November 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 14 November 2022 22:01:25 UTC.
