Play Ball

Question:  

As we are solidly in the third quarter of the year, what are your thoughts about potential market moving events?

Answer:

As this is being written, the first game of the World Series will take place tonight. Although my favorite team is not playing, there’s still excitement in the air prompting some baseball analogies. The third quarter of 2022 feels a bit like we’ve been at bat for a long time and glad to have avoided strike three with a third consecutive quarter of negative growth. 

Consumers still have a healthy amount of excess cash in savings with solid demand for service industry related spending going into the last innings of the year. Airlines, hotels, and rental car agencies suggest that demand is not fading as we move into the holiday season. Retail and food services card transactions remain ahead of pre-pandemic levels. The Fed induced a slowdown in the economy with higher rates although consumer spending supports the belief that the economy will not come to a grinding halt. 

Who doesn’t love the seventh inning stretch, especially at Fenway Park in Boston when the fans from both teams join to sing “Sweet Caroline?” The fourth quarter may be the Fed’s equivalent to a seventh inning stretch, making it the appropriate time to see how the economy has responded to previous rate hikes.

In the six weeks between the Feds November and December meetings there will be two reports on inflation and jobs activity leading some to believe that the Fed could slow to a .50% hike in December. It’s not quite game over for rate hikes, but a breather would be welcomed. 

Earnings season is not quite over. The percentage of companies beating sales estimates is steadily improving. It’s important to note that these averages were inflated by record setting reports as we came out of the pandemic. Overall, earnings season has not been outstanding, but better than expected. 

Market outlooks are based on earnings growth, valuations, and macroeconomic fundamentals. History suggests that the best equity market performance occurs when the National League (Philadelphia) defeats the American League (Houston).  For those of you rooting for Houston to grab their second victory in six years, you could argue that the US economy has been in or entered a recession the two past times that the trophy went to Philadelphia in 1980 and 2008. The average annual return in the twelve months following a NL victory is 4.3% greater than an AL win. 

Stocks have rallied over the past week over hopes that the Fed may back off a bit with future rate hikes. It takes time for their actions to play out in the economy and now may be the time to pause and reflect as markets and the Fed remain data dependent. All eyes are on technology, energy, pharmaceuticals and auto companies going forward. It appears that there could be a potential Fed pivot to a slower pace of tightening in the months ahead as the housing sector comes under considerable pressure from higher borrowing costs. 

The Fed remains committed to bringing inflation back down to its 2.0% target. It appears that there may be some momentum building on the bench to take a breather considering how rapidly rates have climbed this year. Uncertainty remains around post-election market activity with potential for recounts or runoffs, especially in Georgia, that could delay the final outcome past November 8. 

Remaining in the game and having a plan remains critical. Just like financial markets this year, the World Series provides plenty of action, excitement, and a few curve balls. Stay focused and plan accordingly.

Source: FactSet, data as of 10/28/2022.