Market takes another inflation shot

As traders get ready for another inflation-fighting rate hike, the stock market will be attempting to rebound from last week’s inflation-fueled downturn.

Last Tuesday the S&P 500 (SPX) suffered its biggest down day (-4.3%) in more than two years after the Consumer Price Index (CPI) report surprised the Street with an increase—despite a decline in oil and gasoline prices—instead of its second-consecutive decline. And even though the market significantly trimmed its intraday losses on Friday after sliding to a two-month low, it was still the SPX’s biggest down week since June:

The headline: Inflation print trips up latest rally attempt.

The fine print: Was the market a victim of too-rosy expectations? The CPI’s surprise decline on August 10 (which was followed by a brisk stock rally) may have prompted analysts to be overly optimistic about last week’s report, setting the market up for disappointment.

The move: The 10-year US T-note yield closed Friday at 3.45%—just a little below its mid-June daily high, and the highest it’s ended a week since April 2011.

The number: +/-0.3%. Much was made of last Thursday’s 0.3% increase in monthly retail sales, but the fact that sales outside of the vehicle space actually declined 0.3% was less reported.

The scorecard: It was the worst week for the Nasdaq 100 (NDX) tech index since January:

Sector roundup: The strongest S&P 500 sectors last week were energy (-2.3%), health care (-2.4%), and utilities (-3.6%). The weakest sectors were materials (-6.7%), real estate (-6.6%), and communication services (-6.5%).

Stock movers: Akero Therapeutics (AKRO) +137% to $29.05 and NeuroBo Pharmaceuticals (NRBO) +78% to $29.90, both on Tuesday. On the downside, Edgewise Therapeutics (EWTX) -24% to $10.32 on Tuesday, NeuroBo Pharmaceuticals (NRBO) -44% to $16.86 on Wednesday, Rhythm Pharmaceuticals  (RYTM) -24% to $23.31 on Thursday.

Futures: A choppy week for November WTI crude oil (CLX2) ended with prices modestly lower at $84.76/barrel. December gold (GCZ2) broke longstanding support last Thursday, and fell to its lowest level in more than two years ($1,661.90/ounce) early Friday before ending the week at $1,683.50/ounce. Week’s biggest up moves: October VIX (VXV2) +7.6%, December hogs (HEZ2) +5.8%. Week’s biggest down moves: September micro ether (METU2) -13.3%, October heating oil (HOV2) -6.7%.

Wednesday’s Fed rate announcement is the main event, but traders will also get a look at housing data and leading indicators:

●Today: NAHB Housing Market Index
●Tuesday: Housing Starts and Building Permits
●Wednesday: Existing Home Sales, Fed interest rate announcement
●Thursday: Current Account, Leading Economic Indicators Index
●Friday: S&P Global Manufacturing and Services PMIs (flash)

This week’s earnings include:

●Today: AutoZone (AZO)
●Tuesday: Apogee Enterprises (APOG)
●Wednesday: Lennar (LEN), General Mills (GIS), KB Home (KBH)
●Thursday: Accenture (ACN), Costco (COST), Carnival (CCL), FedEx (FDX), Darden Restaurants  (DRI), Scholastic (SCHL)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Traders and investors tired of hearing about inflation will have a growing (if, perhaps, not entirely welcome) distraction in the coming weeks—the midterm elections in early November.

As Morgan Stanley & Co. analysts have pointed out, these elections matter. In contrast to forecasts from just a few months ago, the odds that Democrats will at least maintain control of the Senate appear to have improved, which means legislation with potentially significant economic consequences—including tech and crypto regulation, and tougher China competition measures—could still be in play.²

There’s also the stock market’s historical track record around midterms to consider. This year represents a somewhat extreme version of the US market’s tendency to underperform in the 10 months before a mid-term election. Since 1930, the Dow Jones Industrial Average’s (DJIA) average January–October average return in midterm election years is only 1%, while the index’s average return for all 10-month periods is 5.6%.³  

The stock market’s typical performance in the 12 months after midterms is a different story, though. The DJIA’s average return from the end of October in a midterm year to the end of the following October is 14.3%—much bigger than the 8.3% October–October average return in other years. And since 1962, the post-midterm tendency has been even stronger—the DJIA never failed to rally in the October–October period, and its average return was 16.3%.

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¹ CME Group. CME FedWatch Tool. 9/8/22.
² MorganStanley.com. Why the Midterm Elections Matter. 9/14/22.
³ All figures reflect Dow Jones Industrial Average (DJIA) monthly closing prices, 1929–2019. Supporting document available upon request.