November kicks off with a trifecta of market-moving events.
First, the Federal Open Market Committee (FOMC) meets and makes its interest rate decision on November 2. Two days later, October’s Nonfarm Payrolls Report arrives. And on November 8, the entire country goes to the polls in a vote that could help shape economic and legislative policy in 2023 and beyond. That’s three critical events in less than a week; any or all of which could help set the market’s mood the rest of the month.
Against this backdrop, earnings season goes on, and at midmonth, major retailers will report Q3 numbers and how the inflation-battered consumer may spend for the holiday season.
All of this follows an October that saw the market set new two-year lows for stocks and new 14-year highs for bond yields before things started improving by the month’s close. The mood appeared a bit less gloomy after the week that ended October 21, the best for the major indexes since June. Can the positive vibes make it into November?
First, As Always, With The Fed
Let’s start November’s outlook at the top with a November 1-2 FOMC meeting likely to result in an unprecedented fourth consecutive 75-basis-point Fed rate hike. This will bring the central bank’s benchmark rate to between 3.75% and 4%. These levels stand in stark contrast to basically zero rates at the start of 2022 and would make this the most aggressive Fed hike in decades. Not since the Volcker era has a Fed been so relentlessly hawkish.
As of late October, the CME FedWatch Tool showed a 95% chance of the Fed raising rates 75 basis points in November, virtually guaranteeing this increase, barring some sort of economic or geopolitical catastrophe changing the game by next Wednesday. Projections for another 75-basis-point hike went to nearly unanimous from just 60% a month ago as robust economic data rolled in and inflation rolled on.
If the Fed does land on 75 basis points for November, it will take the target funds rate to the highest level since October 2006. Then the debate moves to December. However, an October 21 Wall Street Journal article suggested the Fed might be closer to a 50-point increase at its final meeting of the year—and the result was last week’s broad rally in stocks and bonds. For a potentially clearer picture, investors will want to listen closely to Fed Chairman Jerome Powell in his post-FOMC press conference on Wednesday. For what it’s worth, the CME tool now puts odds of a 75-point December hike at roughly 50-50, with 50-basis-point hike chances at 47%.
What might move the Fed to moderate at this point? Fear, perhaps.
Some believe Fed officials may be growing worried that rising rates and the U.S. dollar could move to levels that cause some sort of financial “accident” somewhere in the world, possibly the failure of a major bank. When historic rate hikes squeeze borrowers, sometimes the contagion can go far beyond the failure of one company or a single country’s economic policies.
We’re probably not on the precipice of anything close to that, but October’s financial uncertainty in the U.K. that quickly forced out Prime Minister Liz Truss certainly got investors’ attention. The Fed probably noticed as well. That means November will be a month to keep an eye on U.S. and European interest rates for signs of growing fear and to watch the situation in Ukraine closely for its impact on commodity prices.
Consumers Feel More Pain
Whatever the Fed decides to do in November, consumers are dealing with their own brand of fear. According to a recent CNBC survey, 43% of Americans said higher interest rates have had a negative impact on their personal finances. This is almost certainly true for anyone who’s in the market for a home lately. The rate on a 30-year mortgage climbed above 7% to 20-year highs, and October’s Existing Home Sales and Housing Starts numbers showed the sector in steep decline. Home-building companies in particular remain under pressure.
Unfortunately, high interest rates still haven’t done much to stamp out inflation that’s at 40-year highs. If the November 4 Nonfarm Payrolls Report for October shows continued strength, it could raise more doubt about whether high rates have slowed the economy in a meaningful way. The September headline growth of 263,000 was down from earlier this year, but still historically high.
The Consumer Price Index (CPI) and Producer Price Index (PPI) reports for October, both due next month, are sure to get plenty of investor attention after recent results came in hotter than expected. September CPI rose 8.2% year over year and hasn’t slowed much over the last few months. It would help stocks, to say the least, if October CPI pulled back from that level.
There’s also overall economic growth to consider. Preliminary October PMI data from IHS showed signs of weakness, contributing to a market rally on October 24 as investors continued to react positively to any signs of slowing data that might comfort the Fed.
Another key data point arrived Thursday when the government issued its first estimate for Q3 gross domestic product (GDP). It came in at 2.6%, above Wall Street’s 2.3% consensus, and the prices component moderated slightly. The headline number was also up from a negative-0.6% final read for Q2 GDP.
With all this uncertainty, it’s tough to get a read on when or if the Fed will eventually decide to pause rate hikes. About the clearest recent signal came from Philadelphia Fed President Patrick Harker saying last week that “sometime next year, we are going to stop hiking rates.” The Fed’s most recent “dot plot” of rate projections indicates that the so-called “terminal,” or peak target rate, will be between 4.5% and 4.75% sometime in 2023. However, the rate-sensitive 2-year Treasury note already reached 4.6% in October, hinting that investors at least sense that the “terminal” rate has room to rise.
As Washington Waits To See Who Gains
None of this seems like particularly good news for voters or their representatives in Washington, D.C. as November 8 approaches. But there is a chance it might be good for the market.
This isn’t a political column, but current national polls indicate the election could result in a divided Congress. When that happens, not much gets done. That could be bad if you have legislation you want passed. For investors, however, gridlock can actually be a good thing and in some cases may prove a tailwind for the markets once votes are counted.
When elections reset the power structure, they can trigger long stretches of positive or negative moves in the stock market. That was the case in 2016 and 2020, though both of those years were presidential contests. If politics help take the market one direction or the other for a while in November, investors should remember that this kind of politically motivated move doesn’t usually last and that earnings are ultimately a more decisive factor in the market’s direction.
Earnings May Fill In The Blanks
Whatever results arrive at the end of the FOMC meeting or Election Day, earnings season may provide the clearest barometer of where the economy is heading. And though the last two weeks have marked the busiest point of the reporting season, we’re still awaiting news from critical industries in November.
Remember to keep a close eye on company projections, which may mean more than earnings at a time when so many worry about a possible recession. Overall, the guidance picture through late October has been better than expected. Everyone forecasts doom and gloom, but that hasn’t been a universal theme.
The optimism got tested in late October, however, when Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG) reported. MSFT’s earnings per share beat estimates by a few pennies, but revenue was about where analysts had expected, and GOOGL pulled up short in both categories. It’s especially concerning to see GOOGL’s revenue come in lighter, although it was up from a year ago. Lighter ad revenue from YouTube weighed on GOOGL.
MSFT had a deceleration in cloud growth, but when you decelerate and growth is still 42% year-over-year, that’s not necessarily a disaster. The cloud revenue helped offset a slowdown in the PC market.
From a broader standpoint, it’s not good for the info tech sector if MSFT and GOOGL are harbingers of what’s to come as more tech companies report. Also, the softness occurred just a day after weak PMI data, so maybe that speaks to an overall economic slowdown that’s being felt in almost every sector. This was cited in Texas Instruments (NASDAQ:TXN) earnings when the CEO noted deteriorating demand in nearly every sector in the economy, specifically calling out “expanding weakness across industrial.”
November brings more tech earnings, including results from chip maker Advanced Micro Devices (NASDAQ:AMD) and software company Palantir Technologies (NYSE:PLTR), among others. But most of the huge tech companies already have reported.
The most important batch of November earnings arrives in the middle of the month when major retailers start reporting. In the case of major merchants, such as Target (NYSE:TGT), Walmart (NYSE:WMT), Home Depot (NYSE:HD), Lowe’s (NYSE:LOW), and other big-box stores to come, their forward guidance could be more newsworthy than their latest numbers. Now it’s all about how the holiday season is shaping up.
There’ve been some mixed signals out of retail going into the sector’s most important months of the year. Some companies appear to be preparing for thinner shopping lists in the fourth quarter as they’ve signaled fewer hires for the season. On the other hand, consumer confidence reports keep coming in fairly solid despite the year’s stubborn inflation. Retail sales in September were flat, however, from the month before, not exactly a positive sign for the merchants. Inflation was 8.2% year over year in September, but credit card companies reporting their earnings recently, including American Express (NYSE:AXP), said consumers appeared resilient.
Through October 21, about 20% of S&P 500 companies have reported Q3 earnings. Of those, 72% have reported a positive EPS surprise and 70% have reported a positive revenue surprise, according to FactSet. The EPS positive surprise rate is below the 77% five-year average, but the positive revenue surprise rate is above the 69% five-year average.
FactSet’s projected Q3 earnings growth rate for the S&P 500 is 1.5%. If 1.5% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate since Q3 2020.
Spirit Month
Investor spirits got a lift in late October amid a decent start to earnings season and some hopes of the Fed eventually moderating policy. This improved sentiment faces a critical test as the new month begins and the FOMC gathers around the meeting table. What they say, and how the jobs report plays out, could help determine if November lives up to its gloomy reputation or ends up a bit warmer and sunnier than normal.