Acting Diligently

The major indexes moved lower following more volatile trading last week. Friday saw markets earn back some losses, but the Dow closed down 1.4%, the S&P 500 3.4%, and a rough week for technology stocks dropped the NASDAQ 5.6%. In fixed income, yields rose in across the curve on hawkish Fed news with the 2yr up 51bps and the 30yr up 11bps. In alternatives, gold was up 2.59%, while oil crossed $90/barrel on back-to-back 10+% up weeks. Following up on last week’s “good news is bad news” segment (and for those hoping to avert another Philadelphia World Series-driven recession), the Astros beat the Phillies in six games to capture the MLB crown.

This week revolved primarily around the Federal Reserve’s announcement regarding their interest rate increase.  After their initial written statement, markets soared on what appeared to be a softened tone.  Thirty minutes later, however, Chairman Powell gave his speech in which he took a much more aggressive tone and markets soured.  After each meeting, a ‘dot plot’ is released that shows the forward-looking views of each voting member.  The new dot plot showed an increase in the ‘terminal rate’, which is where the Fed believes they will stop lifting rates, leading to concerns that more hikes may be in the works than previously anticipated.

Earnings season continued and saw a mixed bag of results.  Heading into third-quarter reporting, many analysts had adjusted their expectations lower, but most S&P 500 companies have come in above this lowered bar for both earnings and revenue projections.  Notable cases this week involved payment processor Paypal and booking site AirBNB, both of whom beat analyst expectations for the third quarter but saw their stocks plummet due to both companies lowering guidance for the current quarter.  This brings forward the question of whether economic concerns through fourth quarter 2022 will already be priced in or whether additional concerns will weigh on stocks going into first quarter 2023.

This week will still see some earnings trickle in, though not nearly as many big names.  Markets will be watching for Consumer Price Index (CPI) reporting for October. Typically core inflation is viewed as being more persistent than the food and energy component. A common occurrence for markets is an election bump, with a preference for split governments.  We will observe after Tuesday’s results whether or not that holds true for this cycle.

In geopolitical notables, the COP27 summit kicks off Monday, with governments coming together to discuss climate policy. In Israel, Benjamin Netanyahu was elected to serve as Prime Minister, making this his sixth election to the role.  In Ukraine, the war continues with reports indicating significant Russian aircraft loses and rumors that President Biden privately urged Ukrainian President Zelenskyy to show a willingness for negotiations with Russia.

Reports have exacerbated uncertainty, and markets await something to show that things are getting back on track.  As noted, earnings were expected to be worse for the third quarter, but many companies have proved resilient thus far.  Whether such reports are coming sooner or later, our team continues to position portfolios to handle whatever negative comes, but to also prepare for the eventual positive upswing.  We keep in mind Proverbs 21:5, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” While we are eager for abundance to return for the economy, we look to act diligently to weather the current season.

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