Market Note – October 31, 2022

By Hightower Great Lakes on October 31, 2022

Macro Hot, Consumer Resilient

The Fed’s preferred measure for inflation, Core PCE, reported in-line with expectations and increased 0.5% m/m in September and 5.1% y/y.

Consumer purchases of both goods and services remain stronger-than-expected, as spending increased in both categories. Importantly, personal spending grew more than expected, +0.6% m/m, as personal income increased +0.4% m/m.

Prices for services increased +0.6% m/m, led by housing and transportation services. Goods prices decreased -0.1% m/m, largely reflecting lower energy costs.

Services represent approximately 80% of consumer spending, and both categories (goods and services) are much higher than last year. Prices for goods are +8.1% y/y, which includes food +11.9% and energy +20.3% y/y. Services are +5.3% y/y and continue to climb.

Chart 1: PCE and Core PCE Both Rise in September¹

The Fed’s inflation target is 2% and currently, more than 83% of the CPI inflation basket is growing faster than 5% annualized.

Consumer resilience is supporting economic stability, as the first preliminary Q3 GDP report indicated +2.6% q/q expansion.

The consumer represents approximately 70% of U.S. GDP. Consumer resilience is also backed by growing employment costs – up +1.2% in Q3 and +5% y/y.

Higher employment costs reflect the rising cost pressures for businesses and tight labor market conditions. There are currently, still, 1.7 jobs per every available worker.

While consumption has remained strong, the personal saving rate has fallen to 3.1% – the lowest rate since the great recession and a major reason why the Fed is determined to fight inflation, as the risks of persistent inflation outweigh negative impacts from higher rates and slowing growth.

Chart 2: Higher Wages, Less Saving, More Spending²

Stock markets have rallied off a number of factors, including oversold conditions, positive seasonal tailwinds, elevated inflation and solid growth.

70% of the S&P 500 has reported earnings, and 68% of the reporters have beaten earnings expectations. Value names have expanded EPS +8% y/y (led by the energy sector), while growth has contracted EPS -1.3% y/y.

Broad (Quiet) Participants in Stock Market Rally

The rally in equities is similar to the dynamic we experienced in July – following a steep sell-off and amid better-than-expected earnings. On Friday, 90% of stocks in the S&P 500 finished up on the day.

While news headlines remain focused toward growth and mega-cap tech, a number of quieter sectors, such as energy, industrials and financials, have produced encouraging results.

The notable laggards last week were concentrated in names like Meta (META), Amazon (AMZN), Alphabet (GOOGL) and Microsoft (MSFT) that disappointed on guidance and/or missed estimates.

Meanwhile, names like Chevron (CVX), Exxon Mobil (XOM), Caterpillar (CAT), Honeywell (HON), Visa (V) and Haliburton (HAL) all reported encouraging results that reflect benefits from the long energy cycle, consumer spending, onshoring and capex spending themes.

We suspect that energy inflation will remain elevated as the Fed remains hawkish.

High prices within a traditionally cyclical commodity, even as consensus predicts a 2023 recession, are highly indicative that the energy supply challenges will be ongoing.

The cash flows within the energy industry are historical, along with volumes.

The market appears to be embracing a new regime of outperformers. Energy, industrials and financials are the best performing sectors in October.

These three sectors combined represent less than the entire technology sector within the S&P 500 and slightly more than the combined weights of the index’s top five positions: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA) and Alphabet (GOOGL).

We’re hearing about layoffs and reduced hiring in select sectors, but labor overall remains very tight, and we receive an anticipated nonfarm payrolls and job openings report later this week.

Hope for a Fed “pivot” has provided a balance to sentiment amid the high inflation and negative earnings revision fears. However, the tight labor market, persistent inflation and stable economic growth does not lead us toward participating in the “pivot” narrative.

There are two important job data points out this week: JOLTs on Tuesday and Nonfarm Payrolls on Friday. We expect both to continue to show tightness in the labor market.

FOMC Meeting on Wednesday

Markets are pricing in a 75 bps rate November hike and, according to Bloomberg, there’s consensus for at least a 50 bps December hike, with 37% predicting a 75 bps December hike.

We’ll listen, Wednesday, for any indication on what the December rate hike will be. Many sell-side economists have estimated a peak Fed funds rate around 5% next summer.

Assuming the Fed hikes 75 bps on November 2, the new target rate will become 3.75-4.00%.

Bonds rallied through Thursday, then sold off a bit on Friday after stronger than anticipated economic data all but cemented another 75 bps hike at this week’s FOMC meeting.

The 10-year yield ended the week 32 bps lower, while the two-year’s quick sell off on Friday left it down 9 bps. Municipal yields ended the week higher across the curve, with larger 9-11 bps moves seen on the long end.

Investment Grade spreads remain elevated at +184 bps while High Yield spreads tightened 26 bps on Friday and have tightened 77 bps in the past month.

The Week Ahead

Earnings – Tuesday: AFL, LLY, PFE, TAP, PSX, MCK, EA, AMD, MDLZ, CLX, CZR. Wednesday: CDW, MTCH, PARA, EMR, ROK, EL, QCOM, FTNT, EBAY, ETSY, MGM. Thursday: MAR, MRNA, ZTS, K, CMI, COP, EXPE, AMGN, PYPL. Friday: CTVA, CTRA, EOG, CAH, DUK, HSY.

Economics – Tuesday: ISM Manufacturing (October), JOLTs Job Openings (September). Wednesday: FOMC Meeting. Thursday: ISM Services (October), Unit Labor Costs and Productivity (Q3). Friday: Unemployment Rate and Nonfarm Payrolls (October)

Return for Selected Indices³

		% Change
Index Name	End of Week	Week	Month	YTD
S&P 500 INDEX	3,901	3.97%	5.02%	-17.10%
NASDAQ COMPOSITE	11,102	2.25%	0.51%	-28.57%
DOW JONES INDUS. AVG	32,862	5.72%	10.82%	-8.06%
RUSSELL 1000 INDEX	2,144	4.02%	5.00%	-17.97%
RUSSELL 2000 INDEX	1,847	6.02%	7.81%	-16.87%
FTSE 100 INDEX	7,048	1.12%	0.78%	-1.56%
HANG SENG INDEX	14,863	-8.32%	-13.84%	-34.40%
NIKKEI 225	27,105	0.80%	4.37%	-4.00%

				% Change
Index Name	YTW	Spread	Duration	Week	Month	YTD
U.S. TREASURY	4.32%		6.08	1.20%	-1.69%	-14.03%
U.S. AGGREGATE	4.94%	+62 bps	6.31	1.65%	-1.67%	-15.36%
U.S. CORPORATE INV. GRADE	5.87%	+156 bps	7.23	1.97%	-1.47%	-19.33%
U.S. CORPORATE HIGH YIELD	8.99%	+468 bps	4.54	2.44%	2.72%	-12.16%
U.S. MUNICIPAL BOND INDEX	4.22%		6.87	-0.58%	-0.98%	-12.95%

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Click here to read last week’s Market Note (10/24).

SOURCES

¹ Source: Bloomberg (chart) (October 31, 2022).

² Source: FactSet (chart) (October 31, 2022).

³ Source: Bloomberg (October 31, 2022).

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

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This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.