I would like to start by acknowledging and thanking all our professional partners who came to Dallas last week for our Q4 Cabana Advisor Workshop. I cannot tell you how grateful I am to have partners who I believe genuinely care about their clients and the business of investing. This was our second time hosting a workshop for advisor partners, and the time spent going through what we are trying to accomplish at Cabana and getting feedback on that is invaluable in our mission to constantly improve. Thank you!
In my last commentary I suggested that we had some important data points coming up and that markets had the potential to move significantly one way or another. First up were the midterm elections and next was the October CPI report. As far as politics go, investors like certainty. They do not like the prospect of major change to regulatory structure or policy that may impact doing business here or abroad. I always have believed (and still do) that it is about earnings at the end of the day. As such, markets prefer gridlock in government, whereby nobody in Washington can get anything done that could change the outlook one way or another. A divided government fits the bill nicely. Both parties can puff, bluster and threaten, but get nothing done. That appears to now be the case. Next (and even more important over the short term) is the inflation data. We got an unexpected break in inflation with the core CPI number dropping to 7.7% year-over-year. While still bad, it is evidence that the tide is turning, and we are heading in the right direction. This may give the Federal Reserve some room to back off in its recent attempt to stamp out inflation by skyrocketing interest rates and crushing the economy.
Investors cheered in a big way at a glimmer of hope after a very bleak past six months, and the broad indices jumped more than 3% last Thursday. Bond yields fell in unison. This big breakout in stocks follows several weeks of inching higher after again bouncing off this year’s lows in the middle of October. I am a big believer in the ultimate wisdom and anticipatory powers of the markets and the past few weeks have done nothing to dissuade me from this opinion. The question now becomes whether we had reached a real tipping point leading to a pivot by the Federal Reserve and the opportunity to avoid a recession; or is this just another short-term rally within the context of the larger bear market that we find ourselves in. We may not know for several weeks or even months and will need to see inflation continue to trend down to have real clarity. The short-term good news in my opinion is that we have seasonality in our favor and a rally through the end of the year is possible. To me, a climb to 4200 on the S&P 500 by the end of the year seems plausible. We will likely first need to digest some of the gains we have seen recently, and I wouldn’t be surprised to see us go back and test the 3900 level at some point soon. A weekly close above 4000 would be a big positive in my view. These are technical levels to watch and are areas where sentiment among professional investors could change.
