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November 2022 in Review

by Daniel Zeigler, CFP®, CMFC®, Senior Portfolio Manager



Welcome to the monthly market update from Midland Wealth Management. I am Dan Zeigler, Senior Portfolio Manager. Today I just wanted to take a few minutes to give you an update on the markets for the month of November.

Equity markets continued their recovery from October lows, ending the month on a high note. The S&P 500 was able to rally 5.5% in November and international markets saw a nice recovery, as well, with emerging markets rallying by nearly 15%. The S&P 500 is still down about 13% this year and the tech-heavy Nasdaq Composite has slumped close to 27%.

November has certainly been a busy month for economic data, Federal Reserve updates, and the mid-term election results. So what has led to the latest positive momentum in the equity market and what risks remain? Historically, after a mid-term election, market volatility typically declines, and a split government will likely lead to greater political gridlock. A split government is a welcome result for the U.S. equity market, as big fiscal spending will likely be off the table.

The 3rd quarter U.S. growth was stronger than previously estimated, as GDP increased at an annual rate of 2.9%, up from an initial estimate of 2.6%. The overall job market remains resilient, however, it does show signs of slowing according to the latest ADP jobs number this week. On Friday, investors will be watching the all-important nonfarm payrolls jobs number, which is expected to show an increase of about 200,000 jobs for the month of October and for the unemployment rate to stay at 3.7%.

Investors continue to see signs that inflation is moving in the right direction. The latest CPI numbers confirm that and show that year-over-year inflation has moved down to 7.7%, which is the lowest since January 2022.

Powell’s recent comments offered a welcome boost of optimism as he signaled the Fed was potentially gearing up to deliver a smaller rate hike of 50 basis points at their next meeting on December 14th after four straight increases of three quarters of a point increase. The Fed will have one more glimpse of an updated CPI number a day before their Federal Reserve meeting.

Given the expectations of lower rate hikes from the Fed and signs that inflation has peaked, the 10-year Treasury has also seen a huge move lower. In early November, the 10-year Treasury was yielding around 4% and is now around 3.5%, however the 2-year Treasury is around 4.37%. The downward move in the 10-year Treasury has led to the most deeply inverted Treasury curve in more than four decades. Typically, the Treasury yield curve slopes upward, not downward, when the bond market sees brighter growth prospects ahead. In addition, investors demand more compensation to hold a bond for a longer period, which also should lead to an upward sloping yield curve.

Given the latest rally in the equity market, stock valuations are now trending slightly above their long-term averages. Currently, the S&P 500 price to forward earnings ratio is around 17.5x, which is slightly above the 25-year average of 16.5x. Corporate earnings expectations have been going lower and analysts are now expecting earnings for the 1st quarter of 2023 to decline by about 2.1%. However, for the year, analysts are still expecting earnings to grow by about 5.5% for the year. We’ll be closely monitoring corporate earnings in the 1st quarter to see if they are in line with expectations or if there will be further downside to earnings.

As we close out the year, our investment team will be digesting all the economic data as we continue to set our strategies for 2023. We continue to remain cautious and will be paying close attention to earnings expectations, unemployment trends, inflation data, and the Federal Reserve policy. As always, if you have any questions or want to speak to someone, please do not hesitate to give us a call. Hope everyone has a great holiday season!