October gave us quite a run for our money with the S&P 500 up a strong 7.99% for the month, which was a welcome reprieve. November so far has displayed the volatile ups and downs we’ve been accustomed to this year, with a large surge on Thursday on news of cooler-than-expected inflation.

This leads us to the all-important question… is this a bear market rally or a market bottom? We are seeing more and more evidence the market really wants to rally out of this bear market, but it’s up against Fed-speak and higher interest rates. And we believe that ultimately, the path of these two items will dictate whether the worst is behind us. We discuss these in more detail during this market update.

Continuing the discussion on rates, the Fed raised rates by 75 basis points last week, making it the sixth rate hike this year. The Fed indicated they will continue to raise rates until they see signs inflation is significantly down and approaching their 2% target, which the market anticipates happening in May of 2023, as shown by the blue line in this chart. When the market starts sensing that last rate hike, that’s when it can really start to take off.

Keep in mind, as long as the Fed is tightening, both stocks and bonds will continue to experience episodic volatility. The market is currently pricing in another 50 basis point hike in December, which we believe will occur. If the Fed signals an additional slowing of rate hikes during their December meeting, then we believe the market will rally on that news. We also believe another cooler-than-expected CPI report in December may provide additional support for the Fed to signal a slowing of rate hikes into 2023.

We’re letting out a collective sigh of relief that the midterms have passed, and the world is still spinning. Voters delivered a mixed verdict, with Republicans heading for control of the House by smaller margins than forecasted, and the race for Senate still open, as of this recording. Washington gridlock is a bear for commuters, but bullish for markets. With the Fed so focused on inflation, we believe the results of the midterms won’t have much of an impact on the market. That said, the market historically rallies after midterm elections, with the S&P 500 posting an average return of 16.3% in the 12 months after the election… that’s more than double the historical average for non-midterm years.

With the election out of the way, all eyes are now on the Consumer Price Index report. October’s CPI number is up 0.4% for the month and up 7.7% for the year. Prices rose less than expected, meaning inflation may be starting to cool. To be sure, inflation must come down significantly for the economy (and market) to grow; however, this takes time, and yesterday’s CPI report shows the trend is starting to move in the right direction.

So where does that leave us? We don’t think we’re out of the woods yet, and positioning remains critical for our clients’ portfolios. We’re sticking with value, quality, and dividends, and staying away from speculative companies with high PEs and no earnings on the horizon.

We remain underweight international, which has helped portfolios fare better in light of continued geopolitical tensions, energy concerns abroad, and a strong US dollar.

For the first time in years, bonds are looking more attractive and we’re re-evaluating fixed income allocations for income-focused investors.

The key to surviving bear markets is patience, and we’re reminding ourselves this is “short-term pain for long-term gain”. October’s market performance, and more recently this week’s market performance reminds us why it’s impossible to accurately time the market.

The average bear market associated with a recession tends to last 18 months. Compare that to the average secular bull market lasting 15-20 years. The bear will go back into hibernation and the bull will likely return in 2023. We think we’re about 3 quarters of the way through this one, with the potential for the market to set new highs towards the end of 2023 and into 2024.

As always, please contact our team with any questions and let us know what else we can be doing for you and your family.