Cooling inflation leads to red-hot day for the markets
Part of being neighbours with the most powerful country in the world is that sometimes their news tends to get reported with a louder megaphone than our own—even in our own backyard.
That was certainly the case in business news this week as the U.S. consumer price index (CPI) data was released. October’s year-over-year inflation came in below expectations at 7.7%, which is down from 8.2% in September. The S&P 500 shot up 5.5% in response, the 15th-largest daily gain for the index since 1950.
The TSX also rose that day, up a strong 3.3%. Expectations of a 0.75% rate increase at the next U.S. Federal Reserve funds meetings decreased as traders started to lean towards only a 0.5% increase. The drastic movement we saw in the markets around the world illustrates just how important U.S. interest rate moves are right now.
Hopefully this deceleration of prices allows the Fed the breathing room they feel they need to stand back and observe before taking more dramatic actions. Several really smart investment folks are getting nervous or downright hostile about the risks that the Fed is courting by raising interest rates so quickly.
On a recent Masters in Business podcast, guests chief investment officer Jeremy Schwartz and investing prof Jeremy Siegel broke down why they’re scared of overtightening. Considering these two market gurus just put the finishing touches on the sixth edition of Stocks for the Long Run, I’d say their predictions are much more worthy of consideration than most. This book is commonly cited as the most authoritative text on historical returns of the U.S. stock market.
The other big news story this week was, of course, the U.S. midterm elections. When we get past the pageantry that is the U.S. electoral process, we see that the markets generally embrace the idea of a “split government.” This is due to the fact that investors enjoy stability. And, in this polarized age, it is quite unlikely that major corporate tax legislation is bound to change much with a Democratic president likely to veto any proposed changes from the Republican House of Representatives.
Perhaps some of this “no changes needed” psychology is behind the fairly large outperformance of the U.S. stock market in years that follow midterm elections. That said, the S&P 500 dropped 2% on Wednesday (before skyrocketing on Thursday) likely due to a mix of general unease with the yet-to-be-determined makeup of the new Congress, along with a slight pro-business bias that a stronger Republican turnout would have spurred.
Disney’s returns aren’t magical
To wrap up U.S. markets before moving on to Canadian happenings, earnings season is beginning to tail off for our neighbours to the south. Here’s a look at a few notable reports this week. (Disney and Mosaic report in U.S. dollars, while BioNTech reports in euros.)