The Lookout | Week of November 7, 2022

The Lookout | Week of November 7, 2022

Between an October CPI figure release and the US Midterm Elections set for Tuesday, investors will have plenty to watch this week. Hunter Frey of Catalyst Funds, Rational Funds, and Strategy Shares and Matt Ferratusco of Lyons Wealth Managements let us know what they’ll be watching in this week’s edition of The Lookout.

Major Market Events:

Tuesday, November 8: CNY CPI (YoY) (Oct) & CNY PPI (YoY) (Oct)

Wednesday, November 9: US Crude Oil Inventories & MXN CPI (YoY) (Oct)

Thursday, November 10: US CPI (YoY) (Oct) & US Initial Jobless Claims

Friday, November 11: GBP GDP (QoQ) (Q3) & EUR German CPI (YoY) (Oct)

Hunter Frey, Investment Analyst, Catalyst Funds, Rational Funds, Strategy Shares

• With Fed hawkishness persisting, tomorrow’s midterm election results looming, and an inflation print on the way, equities remain mixed. Volatility continues to grip markets ahead of midterm results as anticipated. We continue to remain tactically bullish on equities throughout the remainder of the year amid historical midterm and December rallies. However, with the labor market remaining historically tight, fear of the Fed’s continued hawkish monetary policy weighs on market upside. Layoffs in tech continue, but Thursday’s CPI reading remains the most anticipated event of the week.
• Treasuries continued to climb across the curve, reaching a 15-year high. Short-term bonds remain at some of the most attractive levels not seen in a decade with ultra-short bonds serving as a cash alternative. Money market funds appear to be paying lower yields than the current treasury yield amid higher expense ratios, suggesting a dysfunction amid savings accounts. Investors should remain diligent in their cash management solutions to minimize further leakage.
• Overall, we remain bullish on equities throughout the remainder of the year, especially if unemployment increases and inflation decreases amid hawkish monetary policy. We also remain bullish on short-duration bonds amid increased duration risk. We believe that the need for investors to adopt a 50/30/20 portfolio allocation continues to exponentially increase with the 60/40 portfolio experiencing historic losses this year. Thus, this week, we will discuss the challenging policy dynamic and the trajectory of inflation over the next 5 years, leading to stagflation (which we have discussed at length).

Matt Ferratusco, Lyons Wealth Management, portfolio manager of a tactical allocation strategy 

• In the wake of last week’s dichotomous FOMC statement and Powell’s comments, an outsized market reaction may follow the October CPI print set to be released on Thursday. Expectations are for the headline reading to push 8% year over year. Anything but a surprise softening in the data may refuel the selloff triggered by Powell’s hawkish tone. Conversely, the committee acknowledged the lagged effects of policy decisions, laying the highly anticipated foundation for a slowing in rate hikes. Should the CPI surprise to the downside, the relief rally may get legs to continue higher.
• The October data will weigh heavily on market expectations for the size of the next rate hike. Despite Powell’s comments to the contrary, the FOMC’s seemingly less-hawkish tone raises the possibility that a reduced 50 bps increase to the Federal Funds Rate is on the table for the December FOMC meeting.
• Food prices continue to drive high inflation and energy is expected to increase for the first time in several months, while key goods prices are declining as economic normalization continues to shift consumer spending toward services.