Weekly Market Update: November 7, 2022

Alex Ralicki |

The nation’s economy expanded by an estimated annualized rate of 2.6% in the third quarter. That followed two quarters of contraction and lifted sentiment about the Federal Reserve’s ability to orchestrate a “soft landing” for the U.S. economy as the central bank fights inflation. As expected after the conclusion of the November Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced a fourth straight three-quarter-point hike to the benchmark short-term interest rate, pushing the federal funds rate to 3.75%-4.00%.

A closer look at the Gross Domestic Product (GDP) report, however, showed two worrisome developments. These included a quarter-to-quarter slowdown in personal consumption growth (from 2.0% to 1.3%) and a more-than-25% decline in residential investment. These two sectors are big contributors to GDP growth. In general, stubbornly high inflation, and the resultant rising borrowing costs from the central bank’s monetary policy tightening, have made it harder for companies to invest in their businesses and for consumers to obtain credit. On point, the rate on the average 30-year fixed mortgage recently topped 7.00%, curtailing affordability for many buyers.

Meantime, third-quarter earnings season has been better than expected so far. With slightly more than half of the S&P 500 companies having reported at press time, there were plenty more positive than negative revenue and profit surprises. This was the primary catalyst behind the equity market’s sharp rally to close October.

The technology sector, which outpaced the market over the course of several years, has disappointed Wall Street this reporting season. True, there were some strong performers, including Apple with its record September-quarter revenue, but that has been more the exception than the norm. Indeed, shares of Alphabet, Amazon.com, Meta Platforms, and Microsoft all fell sharply on disappointing results and/or negative expectations about the final calendar quarter. The rising interest-rate environment has weighed on higher-growth technology companies, as well, with many investors favoring “value” stocks as interest rates rise.

Conclusion: The equity market rallied notably to end last month. However, we would not throw caution to the wind, as investors still face plenty of uncertainty. This includes the health of the global economy, a looming energy shortage in Europe and elsewhere, and whether the Federal Reserve can successfully rein in inflation without pushing the economy into recession.