Last week, we were again reminded how closely investors are watching inflation reports for signs of a peak, which could mean a Federal Reserve pivot in the near future — or so they hope.
We saw a major rally across the board on Thursday — with the S&P 500 seeing its best day since 2020 and the Dow Jones Industrial Average jumping 1,200 points — after the Labor Department released its Consumer Price Index (CPI) for October, which rose a less-than-expected 7.7%.
The news capped another up-and-down week, where we saw the market climb leading up to Election Day on expectations for a gridlocked Congress, but we are still awaiting final results. This time period of heading into the holiday season, post-Election Day, has historically been strong for stocks.
However, even with Thursday's cooler-than-expected CPI reading for October, we expect to close out this year in the same choppy trading range we are now getting used to against the backdrop of persistent uncertainty, a tight labor market and elevated inflation.
Though the Fed's latest rate hike in November was no surprise, it appeared to give off some dovish tones in its policy statement, acknowledging it would consider the lag effects of all its rate hikes on the economy when making future policy decisions. (Remember, it typically takes six to nine months to feel the effects of a rate hike and other policy moves.) But Fed Chair Jerome Powell struck a more hawkish tone during his press conference. The major takeaway was that we can expect higher rates for longer.
Where does this leave us? We have been talking about this for a long time. Yes, 2023 is highly likely to see slower growth — because that is what the Fed is working to engineer. Will it be a full-blown recession? Or will it be more of a shift to a slower pace of growth? Nobody knows for certain, but we do know that a slowdown is coming.
While I do see opportunity in this market environment, the recent choppy trading range with big fleeting swings on any given inflation report is likely to continue through to the end of the year. With that in mind, between now and the holidays, I am bullish on value stocks — energy, financials, materials, industrials and health care — over growth equities.
Mixed Signals
Let's look at the jobs front to better understand Powell's hawkish tone. Nonfarm payrolls grew by 261,000 in October, better than the estimate for 205,000, plus we got higher revisions for prior months.
On top of that, last week the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) reported an increase to 10.7 million open jobs in September, from a revised 10.3 million a month earlier. The median estimate was 9.8 million. This means right now there are more job openings than unemployed people.
