It’s Election Time!

Perhaps the most important week of the year?!  If you’ve been watching tv or surfing the internet, you may certainly think so….

We’ve heard both parties talk about how awful the opposing party will hurt our economy and our way of life, if elected.  The amount of finger-pointing going on suggests politicians have 20 fingers, not 10!!

My hope is for true, unquestioned election results.  If our most recent history repeats itself, it may be a while until all election results are finalized.  I’m not just talking about the last Presidential election.  Go back a bit and you may recall other elections being questioned.

Of course, I’ve spent hours reading about how election results will impact the economy and the stock market…. I never viewed a divided government as bad for both!  Let’s see what happens.  The only control we all have with the election results is to go out and VOTE!!  Please do so!

Chairman Powell did not disappoint last week when he raised rates as expected, and then went on to say it is premature to think about pausingPowell suggested that monetary policy may need to be restrictive for longer than originally thought.  My question: what will it take for Powell to actually start thinking about what needs to happen to pause future rate increases?

We are currently hearing about tech and housing-related companies laying off employees.  Job growth has also begun slowing down, although still positive with 261K hired in October. Used car pricing has started to budge.  New and existing home purchases have slowed significantly.  Perhaps it’s time to sit back the let the current rate hikes work through our economy.

My hope is that Chairman Powell will begin forward looking & thinking, as opposed to simply reacting to data that looks backwards.  But then again, human behavior typically does not change unless something dramatic happens.

Thursday brings the CPI reading for the month of October.  In September, the headline rate reported at 8.2% and the core, (minus food/energy) at 6.6%. This reading may impact what Chairman Powell does at the last Fed meeting of the year in December.

The Markets

85% of S&P 500 companies have reported 3rd quarter results.  The Price to Earnings (PE) ratio now sits at 16.8.  Most believe a PE between 16 and 18 is very reasonable.

So far this month, the S&P 500 is down (2.6%).  The stock market has been following the trends, when one party is in full power.  The market goes down during the mid-term election year until the election.  The average S&P 500 gain for the 4th quarter during this type of election year is 3.7%.  Let’s hope the markets do respond positively, no matter who wins the election.

I do expect continued volatility into next year.  It’s challenging to break any inflation cycle, especially this one.  Businesses are not going to reduce prices until they have to.  Why would a restaurant lower prices if they are fully booked??  Product sellers and producers will only reduce prices if they have unwanted inventory, or the economy significantly slows.

In my opinion, China has been a significant contributor.  Keeping their country in Covid lockdown obviously reduces the chip manufacturing capacity, which is one of our major issues.  Call me skeptical, but I do not believe that China’s main concern is the covid-free health of it’s population. What a great way to go to war with the United States and other countries…..

Is there any good news for the markets?  Perhaps!  Interest rates have climbed significantly this year.  The S&P 500 has traded down to the 3600 area 3 times, each time recovering with interest rates much higher.  Let’s face it, not knowing where interest rates will top out is a main issue with the market. 

The interest rate high is not yet been determined, however we are certainly getting close to the Fed’s terminal rate.  The terminal rate is the rate at which the Fed stops hiking.

With interest rates more historically normal, the 60% stock/40% bond portfolio for those entering and proceeding through retirement should perform as expected.  Meaning when stocks correct, money moves to bonds creating a seesaw effect that limits volatility.  Of course, this year we’ve only had a minor benefit as both stocks and bonds have lost significant value.

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