Fed blinks; Inflation cools; America votes; China buys vaccines; Crypto implodes; Putin retreats. – C.J. Lawrence Market Commentary 11/11/2022

It’s been quite a week. The S&P500 is now up 6% for the week, and the Tech heavy Nasdaq is up 8%.  That all happened in 2 days!

The Fed set the stage for this week’s October inflation report with its 3^rd consecutive increase of 75bps, setting the benchmark fed funds rate to a range of 3.75% to 4%.  The market initially popped on the Fed’s communication which admitted that the data it may be using regarding inflation is lagging. Academics and Wall Street economists have been pointing out that much of the more current data regarding housing and autos may already be signaling much lower inflation. 

Although we believe the Fed may have blinked here, Fed Chair Jay Powell quickly put any optimism to rest in his November 2^nd press conference, where he signaled more aggressive rate increases to come.

Turning to the mid-term elections, markets initially rallied into the November 8 election, pricing in “gridlock” in Washington based on a Republican or red sweep of the House and Senate.  As of this writing, the outcome of the mid-term election is still unclear, but it is anticipated that Republicans will have a slim lead in the House and the Senate may remain Democrat.

Market implications are somewhat muted, given it prefers policies based on fiscal restraint and deregulation, which is less clear in the current configuration. The mid-terms, however, set up a power struggle between Ron Desantis, a clear winner in Florida, and his rival, the former President, who are both vying to lead the Republican party into the 2024 Presidential election.

The big event this week was, of course, the October inflation data, which did not disappoint.  The headline inflation data for October cooled to 7.7%, down from 8.2% in September and down from a peak of 9.1% in June.  These are still very high numbers, but we are on the right track. The all-important core inflation data also came down to 6.3% annual rate, versus 6.6% in September. 

Shares posted their biggest increase since 2020, with the DOW surging 1200 points on the day. That also triggered a decline in interest rates from 4.22 to 3.82% for the 10-year Treasury and a decline from 4.75% to 4.32% for the 2-year.  These are big moves up for both bonds and stocks. 

The Dollar also traded down on the report, which may provide some relief for the earnings, especially of large tech companies that have substantial share of their profits abroad.

Turning to China, the Communist Party reelected its leader Xi to a historic third term.  There was some expectation that Xi may relax covid restrictions post his reelection.  That hasn’t happened, but there is an opening following German Chancellor Scholz’s one-day visit to China, where the Chinese leader indicated a pathway to approve vaccines for the broader population. China purchased vaccines from the German biotech BioNTech for use on foreigners as a first step.  That rallied shares of companies with exposure to China, like Apple, up 9% for the week, which depends on China to produce its iPhone.  

More good news on the international front came from Putin’s further retreat from Ukrainian territories.  It is clear that Russia’s military campaign is in retreat.

Finally, a major crypto exchange, FTX filed for bankruptcy protection yesterday. Given some of our clients’ interest in this new asset class in previous years, we spent some time in 2021 analyzing the economic value of Bitcoin and/or decentralized finance.  Our work was inconclusive, and we never found a security in the crypto space that we found investable. It reminds me of work I did 20 years ago on Enron before they went bankrupt. The unwinding of the crypto bubble echoes some of the hype we saw in the dot.com bubble of the 1990s.

On this Veterans Day, we salute all that have served.

Bernhard

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.