November 2022 Market Commentary

Written by Ayako Yoshioka, CFA

Executive Summary

Inflation may have peaked but has remained higher than many expected. Economic data points have been softening, reflecting the impact of tighter financial conditions on aggregate demand. Despite this weaker fundamental backdrop for the economy, markets saw some reprieve as speculation grew that the Federal Reserve could moderate the pace of rate hikes in the coming months.

What Piqued our Interest

Equity markets attempted to rally once again heading into earnings season, and the Dow Jones Industrial Average ended October with a gain of 14.07%, its best one-month gain since January of 1976 and its tenth-best month of the last 100 years. All equity indices remain in negative territory for the year, but as noted by the Dow Jones Industrial Average return, bear market rallies can be quite strong. Meanwhile, the yield on a 2-Year Treasury note reached 4.5% during the month, the highest level since 2007. Central banks across the globe have continued to raise interest rates to tame inflation, but the predominant question for investors remains: how much further is there to go?

The Federal Reserve raised interest rates by 75 basis points at its meeting on November 2, taking the Fed funds rate from 3.00-3.25% to 3.75-4.00%. This was the fourth consecutive hike of 75 basis points, putting the U.S. central bank on its steepest rate hiking path since the early 1980s. These rate hikes have been the primary tool to combat inflation, which remains stickier and more persistent than expected. The latest measure of inflation, measured by the Consumer Price Index, was reported at 8.2%, down from the peak of 9.1%, but still too high for the Federal Reserve to change its course.

Historically, tightening cycles come to an end once the Federal funds rate is above the rate of inflation. With core PCE inflation (the Federal Reserve’s preferred measure of inflation) reported at 5.1%, and the Fed Funds rate at 3.75-4.00%, there are a few more interest rate hikes to go. However, the bond market has priced in a peak rate near 5%, and the most recent Fed policy statement emphasized that the Fed would take “cumulative tightening” and “lags” into account, which seemed to open the door for the possibility of a downshift to a slower pace of rate hikes. However, the timing of that possible downshift, as well as where interest rates will get to when the Fed stops hiking (the terminal rate), remains uncertain.

With the backdrop of a hawkish Fed and higher interest rates, the U.S. dollar has been strong all year, up 16.6% in 2022. The strong dollar weighed heavily on third quarter earnings, especially for...

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