Earnings/Rates/Jobs Report

GDP, Gross Domestic Product, was reported at 2.6% last week.  Combined with the hope the Federal Reserve is entering the late stages of rate hikes, markets moved higher quite nicely!  Whatever the true reason, anything upward moving is certainly welcome.

Earnings, not including technology, have been holding up better than many anticipated.  This week we’ll continue to hear a meaningful number of companies report.

No matter how good or not so good earnings turn out, it’s the Fed meeting that will be the buzz.  We’ll most likely hear a .75% rate increase this Wednesday, followed by the all-important press conference.  This morning, Goldman Sachs suggested the Fed funds rate will now reach 5%, up from its prior estimate.  Goldman believes the Fed will raise .75% this week, .50% in December, and then .25% in the first two meetings of 2023.

Many investors are anticipating Chairman Powell to indicate the end of rate hikes are near.  I wouldn’t bank on it, yet.  Last week the Fed’s favorite gauge of inflation, the PCE, did not show any sign of falling.  The headline rate for September was 6.2%, matching AugustThe PCE Core rate was reported at 5.1%, up from the August number of 4.9%.  I would anticipate the Fed holding the line repeating prior rhetoric, especially as he cannot be pleased with the stock market rising.

On Friday, we’ll hear our jobs number for the month of October.  Last month, we created 263,000 jobs with an unemployment rate of 3.5%.  For October, it is expected that 220,000 new jobs were created.

Bond Yields

The 10-Year US Treasury ended last week with a yield of 4.01%.  The 2-Year ended with a yield of 4.42%.  Going back to January 1st, the 10-Year yield was 1.5%, with the 2-Year at .73%. 

30-year mortgage rates are now over 7%, on average.  It’s no surprise that new home and existing home sales have fallen rather significantly.  In September, new home sales were down an additional 10%.  Prices have dropped, however many are not expecting decreases that resemble what happened during the Great Recession.  One factor being we simply do not have an adequate supply of new homes being built, especially for the millennial generation.

Growth Stocks continue to trail Value

According the Morningstar, the average Large Growth Mutual Fund is down (25.93%) year-to-date.  The average Large Value Mutual Fund is down (8.86%).

A similar divergence exists with both mid-cap and small-cap mutual funds.

On the bond side, the Bloomberg Aggregate Bond Index is down (15.36%), even after rising last week by 1.65%.  All areas of the bond market are down, with shorter-term maturities down mid-high single digits.  Intermediate and longer-term maturities are down between 8% and 32%. 

I don’t expect bonds to have the same level of performance next year.  The Fed should be finished raising rates before mid-year.  Most bond funds now offer an attractive yield.  The 60/40 portfolio next year should again act like a 60/40 portfolio. 

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