Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
The market has continued to fall this week and we are back at the important support zone established back in September of 2020. This zone marks a -26% decline peak-to-trough. Should this support fail, the next major area of support is the pre-pandemic highs from 2019 which marks a -30% decline peak-to-trough.
The major question is, when is all this going to end? That question depends on how long the Fed intends on raising rates. Currently, FOMC expectations put the peak rate at around 4.6% at some point in 2023. Market expectations, at least since the beginning of October, put the peak rate at 4.21% reached at the end of the year. As of today, the market expects the peak rate to reach 4.75-5.00% early next year. This would imply the Fed is nearly done increasing rates but these expectations from the market and the Fed itself are notoriously bad at predicting the actual peak rate.
Here are a few key signs the Fed is watching as they enter into the final stages of contraction. First, this inflation crisis has revolved around the imbalance between the labor market and employers result in a wage-price spiral. At the beginning of 2022, job openings, shown here, were at record highs and have only just now started to fall. If job openings continue to fall then that would be the first sign that a balance between labor and employers has been restored.
This would result in disinflation of the average hourly earnings index, which saw high levels of rapid growth prior to April of 2022. Only since April has this index started to fall. We need to see a decline and ultimate stabilization of this growth rate to see inflation subside.
Ultimately, this may lead to an increase in unemployment down the road. This will probably be the last shoe to drop and at that point, the market likely already sniffed out capitulation from the Federal Reserve.
All of this revolves around the money supply, which is the ultimate cause of systemic inflation. As money supply increases, more dollars are suddenly buying fewer goods and inflation increases in conjuction. But it’s not always a 1 for 1 increase. In fact, there’s about a 6 month to 2-year lag between increases in the money supply and increases in inflation as the extra dollars work its way through the economy. Fortunately, money supply growth shown in blue has been falling steadily for a while now which should translate to CPI disinflation shown in purple in the near future. At that point, the Fed will capitulate.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved October 21, 2022, from FactSet Database.
2.JP Morgan Asset Management. “Guide to the Markets.” Slide 34, “The Fed and interest rates.” Updated September 30, 2022. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
3.Ycharts. “US Average Hourly Earnings YoY.” Updated September 30, 2022. Retrieved from https://ycharts.com/indicators/us_average_hourly_earnings_yoy
4.FactSet Research Systems. (n.d.). Unemployment Rate (Interactive Charts). Retrieved October 21, 2022, from FactSet Database.
5.FactSet Research Systems. (n.d.). M2 Money Supply & Total CPI YoY % (Interactive Charts). Retrieved October 21, 2022, from FactSet Database.
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