The major North American equity market indexes finished one of the most volatile weeks of the year mostly lower, with the Dow Jones as the only index in positive territory by week’s end. Concerns over inflation, earnings, and the Fed’s response to the latest inflation data weighed on investors’ minds. The biggest move in stocks came on Thursday when the indexes in pre-market trading were up, only to plummet lower into negative territory when the CPI data was released pre-opening. The reverse back to a positive area was dramatic, to say the least, with a market move of 1500 points from bottom to top on the Dow Jones. Technical factors also played into the market volatility, with many thinking the market was over-sold and the increasing number of put options allowing the holder to sell their stocks at a specific price.
In the week, the defensive consumer staples, health care, and financial stocks held up better than growth, as did slow-growing value. Consumer discretionary communication services, and information technology sectors were significant detractors in the week. Year-to-date, the energy sector is the only positive sector.1
On the data front, the small business index released by the NFIB on Tuesday showed a slight increase in optimism, rising 0.3 points in September to 92.1. The latest reading is the ninth consecutive month the index is below the 48-year average of 98. “Inflation and worker shortages continue to be the hardest challenges facing small business owners,” NFIB Chief Economist Bill Dunkelberg said. “Even with these challenges, owners are still seeking opportunities to grow their business in the current period.”2
On Wednesday, the US Bureau of Labor Statistics stated wholesale prices, or the PPI Index for final demand, increased by 0.4 percent in September, the first increase in three months. The final demand index is up 8.5 percent for the twelve months ending September. As reported, two-thirds of the demand increase is attributed to services. The separate index that strips out food and energy (core PPI) also increased by 0.4 percent in the month. The core index is up 5.6% for the last twelve months. The decline in June and July was attributed to falling fuel prices.3
On Thursday, the latest CPI reading rose 0.4% in September, and for the last twelve months, increased 8.2%, down 0.1% from the August level. Shelter, food and medical care were the most significant contributors to the rise in September. Gasoline declined by 4.9 percent, while the energy sector rose due to increased natural gas and electricity costs. The reading more closely watched by the Fed, core CPI, ex-energy and food, increased 0.6% in the month and over the last twelve months rose 6.6 percent and increased from 6.3 percent in August.4 Also, on Thursday, the initial unemployment claims increased by 9,000 to 228,000 for the week ending October 8. Continuing claims for all benefit programs for the week ending September 24 increased by 7,935 to 1,254,842.5
On Friday, September’s retail sales fell, which is expected because September is between back-to-school shopping and the end-of-year holiday season. Adjusted for inflation, retail spending remains the same as last year.6 Also, on Friday, consumer sentiment reportedly rose to 59.8 in October from 58.6 in September. Additionally, consumers’ near-term inflation expectations rose to 5.1% from September’s 4.7%. Over the next five years, consumers’ inflation expectations increased slightly to 2.9% from 2.7%, according to the same University of Michigan report.7
The latest PPI and CPI data confirm the Fed’s case for higher rates rather than, as many had hoped, a pause, a change of tone in the Fed rhetoric, or a reversal of the aggressive rate increases. The Fed has repeatedly indicated it is serious about achieving its target inflation goal of 2%. Based on previous comments from Fed officials, we believe that until inflation is trending lower for several months, the Fed will continue to tighten to its stated terminal rate unless there is a break in the system. This suggested that the market will trade on response to Fed policy, Fed tone, Fed announcements and corporate earnings in the coming months.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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