Goodbye, October rally.  The November cold is here

Goodbye, October rally. The November cold is here

This article first appeared in the Morning Brief. Get the Morning Brief delivered straight to your inbox Monday through Friday by 6:30 a.m. ET. Subscribe

Friday, November 4, 2022

Today’s newsletter is from Julie Hyman, presenter and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and other market news wherever you are with Yahoo Finance app.

Avid watchers of Yahoo Finance’s live programming may have noticed an emerging theme over the past week regarding the Federal Reserve meeting – beware.

On Monday, the Dow Jones came out of its best month since 1976. The S&P 500 and the Nasdaq had rebounded from their lows, but with smaller rallies. “Hopium” was in the air, partly based on optimism that the Fed would show signs of closing its tightening cycle.

But analysts urged caution ahead of the Fed’s interest rate decision on Wednesday.

“We think the October rally in risk assets is really on shaky ground,” Wei Li, BlackRock’s global chief investment strategist, told us on Monday. “Because the markets were previously looking for a dovish pivot from the Fed, then they were looking for a pause from the Fed, and now the markets are excited about the slower pace of rate hikes.”

The October rally may be coming to an end.  Image: Getty

The October rally may be coming to an end. Image: Getty

“I think it could take longer than expected” for the Fed to “pivot” or stop raising rates, Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments, told us on Tuesday. She predicted that the realization would drive down stocks.

Li said that in addition to a disappointment from the Fed, a weaker economy and lackluster earnings could put pressure on stocks. “A lot of bad news is really starting to materialize, and it’s yet to be reflected in market prices,” Li said. We’re still talking about mid- to high-single digit earnings growth in the US That’s definitely not in line with our expectations for a recession.

Jennifer Lee, senior economist at BMO, warned viewers about consumer spending on Wednesday: “I think consumer spending has already started to slow. And it will slow down again. We still look forward to consecutive quarters of negative GDP growth in the new year. And contributing to that will be a slowdown in consumer spending.

The comment came Wednesday ahead of Fed Chairman Jerome Powell’s press conference, which mirrored the predictions of those strategists and economists. But it seems that the market has not yet priced in the likelihood that the central bank is not ready to slow rate hikes.

“It’s very premature, in my view, to think or talk about pausing our rate hikes,” Powell said.

The S&P 500 reacted by falling 2.5%, and continued its descent on Thursday.

Investors didn’t have time to catch their collective breath after the Fed ahead of this morning’s October jobs report. If this week’s action is any indication, a better than expected report could continue to hit stocks.

On Wednesday, a higher figure in the ADP jobs reading sparked a decline in futures. Indeed, a healthy job market means that Americans still have money to spend and will continue to pay higher prices. This, in turn, makes the Fed’s task of reining in inflation even more difficult, meaning the cycle of rising interest rates could last longer.

“Inflation is high enough [that] the only way the Fed can get back on target is to slow demand so much that it creates a very high probability of a recession,” Vincent Reinhart, chief economist and macro strategist at Dreyfus and Mellon, told Yahoo Finance. “Yes, in six to nine months we will be in a recession.”

What to watch today

Economic calendar

  • 8:30 a.m. ET: Change in non-farm payrollOctober (195,000 expected, 263,000 in previous month)

  • 8:30 a.m. ET: Modification of the private payrollOctober (200,000 expected, 288,000 in previous month)

  • 8:30 a.m. ET: Change in manufacturing payrollOctober (12,000 expected, 22,000 in previous month)

  • 8:30 a.m. ET: Unemployment rateOctober (3.6% expected, 3.5% in previous month)

  • 8:30 a.m. ET: Average hourly earningsmonth-over-month, October (0.3% expected, 0.3% in prior month)

  • 8:30 a.m. ET: Average hourly earningsyear-on-year, October (4.7% expected, 5.0% prior month)

  • 8:30 a.m. ET: Average weekly hours All employeesOctober (34.5 expected, 34.5 in previous month)

  • 8:30 a.m. ET: Labor force participation rateOctober (62.3% expected, 62.3% in previous month)

  • 8:30 a.m. ET: Underemployment rateOctober (6.7% the previous month)

Earnings Calendar

Berkshire Hathaway (BRK.A, BKR.B), duke energy (EVERYTHING), Dominion Energy (D), Hershey (HSY), Honda Engine (MHC), Cardinal Health (ACH), Royal Caribbean (RCL), Cboe World Markets (CBOE), nomura (NMR)

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