The market roared ahead Monday, in sync with Friday’s closing, as the Dow Jones Industrial Average soared 400 points. Investors and traders were seemingly uplifted by a possible lower tightening figure, just maybe a 50 basis point increase for October. Many feel that a ‘downward’ number would signify more caution and concern regarding the initiation of a recession. Even after the Fed raised rates by 75 basis points three times a significant turn-around has not occurred. The labor market has shown strong signs of job growth amidst soaring inflation. The most affected sector, the housing market, is reacting very strongly and has seen surging mortgage rates. As mortgage rates ‘sour’ and housing starts dwindle, the Fed anticipates interest rates begin to fall rapidly.
Stocks continued strong on Tuesday, as blue chips led the way, showing ‘renewed’ confidence and sustainability…for the short term. Even with some leading high techs reporting just average numbers, the indices are holding, especially the Dow and S&P 500. More reporting will occur later in the week with some influential corporations bound to sway the market. Consumer spending remains exceptionally strong, as the willingness to ‘pay the price’ for goods and services.
The overall market began to soften on Wednesday’s open as the anticipated upcoming earnings reports began to filter in. As mentioned above, more negative reports from the ‘big-guys’ stalled the indices as traders and investors were mired in more negative news. The tech-heavy Nasdaq Composite began to suffer with popular equities taking major losses. As always indices experienced sell-offs. “The fact of the matter is, we are heading into, whether we want to call it a recession or not, we’re heading into a softer or tighter macro environment… you hear this from all software vending,” RBC Capital Markets Software equity analyst, Rishi Jaluria as he told Yahoo Finance live on Tuesday following the quarterly earnings reports. After the bell on Wednesday more earnings reports came in, and many missed expectations, setting the stage for Thursday…on a negative footing.
As the week rambled on with little new direction, and news of a tightening coming up, the markets were up and down. The Dow Jones and S&P 500 edged slightly higher with the tech-heavy Nasdaq dropping to negative territory closing Thursday. The Commerce Department released a report on Thursday showing the U.S. economy grew at a rate of 2.6% July through September, a figure that is acceptable in these times. Add in the jobs situation and you have more fodder to disclaim a recession.
As mentioned above the sector most rapidly affected by the interest rate hikers is the housing markets, both new and existing. Mortgage rates are pushing 7%, with a near ‘lock-down effect’ taking place. As mortgage rates have accelerated from the 2’s to 3’s to the high 6’s, building and buying have seen an ‘overnight’ re-staging as interest rates are the rule. New housing starts slowed 10.9% in September from August. Real estate sales of existing homes have declined for eight straight months. According to the Mortgage Bankers Association, mortgage applications have dropped 42% from a year earlier. As of Wednesday (10-26) the average rate for a new home mortgage was 6.94% At the end of last year the rate was 3.1% according to Freddie Mac. The Commerce Department said the median home selling price was $428,000 in the first quarter of 2022, up from the medium price of $329,000 in 2020.
RUMBLINGS ON THE STREET
Joe Light, writer for Barron’s “Crypto” isn’t dead, but its core tenets are on life support. Gone is the illusion that Bitcoin is an inflation fighter. The first serious bout of inflation since the 1970’s has coincided with a 60% drop in Bitcoin’s price over the past year. Gone too is the case that Bitcoin is ‘digital gold.’ The precious metal has cruised past Bitcoin, stocks, and bonds this year, falling just 6%.”
Christopher Walker, Fed Governor at a speech this month, WSJ “We will have a very thoughtful discussion about the pace of tightening at our next meeting.”
Neel Kashkari, Minneapolis Fed President, said Tuesday, WSJ “The problem for me with trying to say, ‘Hey it’s time to pause,’ is we’re not even sure that we’ve got rates high enough to push services inflation down.”
Mark Haefele, chief investment officer at UBS Global Wealth Management, Barron’s, “We believe that the conditions will be in place for a sustainable rally once investors can see Federal Reserve rate cuts or a trough for economic activity on the horizon, or when valuations are so low that they already price in a bear case scenario,” Mr. Haefele said.