Market Update: October 14, 2022

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.

 

Since our last update, we’ve seen some unusual activity in both the stock and the bond market revolving around the September inflation reading and market expectations over Federal Reserve actions. First, a quick update on where we stand on the S&P. Thus far, the important horizontal support line dating back to September of 2020 remains intact and the market has now bounced off that low with fervor, twice. That low marks a -26% decline peak-to-trough.

Yesterday, October 13th, resulted in one of the more unusual trading days in my career. Prior to the 13th, the market was actually pricing in bad news for Thursday’s inflation reading. This probably explains some of the weakness seen in stocks and bonds prior to the 13th as expectations for a hawkish Fed continue. However, the CPI reading actually came in a bit worse than expected with inflation rising .4% month-over-month. Unsurprisingly, the market sold off 4% on the announcement. At the opening bell, however, the rest of the day would not result in typical market behavior. Unexpectedly, the market rallied off of the bad inflation news and just kept going all day resulting in a 5% gain from the bottom, an incredible reversal of market strength. The most likely explanation for the unusual rally is that short sellers simply covered their positions. During strong bear markets, short sellers are typically the first buyers of stocks signifying market bottoms. Unfortunately, short sale covering can also be indicative of bear market rallies depending on forward economic expectations. So this one day rally is NOT necessarily indicative of a market bottom. Continued strength will need to confirm that.

Unfortunately, bond market news, which has been driving the stock market, is trending in the wrong direction. This graph shows expectations for actions from the Federal Reserve for their December meeting. At this point, a 75-basis point hike is fully priced in for November. But prior to the Thursday CPI reading, the market was expecting those rapid hikes to subside and stop beginning in December with a 50-point hike. However, the odds now favor another 75-basis point hike meaning the bond market is expecting the Fed to remain unreasonably hawkish. Because this bear market was started by a hawkish Fed, it likely will not end until the Fed reverses course.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved October 14, 2022, from FactSet Database.

2.FactSet Research Systems. (n.d.). Policy Rate Tracker (Markets). Retrieved October 14, 2022, from FactSet Database.

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