Market Update - October 14, 2022

October 14, 2022 | St Louis Private Wealth


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Good morning,

This past week, the U.S. consumer price index (CPI) for the month of September was released and, it was not only higher than expected, but also higher than the preceding month. The “core” measure, which excludes food and energy prices, rose to a pace of 6.6% year over year, which represents a new multi-decade high. While it is only one data point, its release undoubtedly disappointed investors who were looking for a further slowing of pricing pressures after the data during the summer suggested the peak of inflationary pressures may have passed. Overall, the persistence of inflation should incentivize central banks to remain on their rate tightening paths.

The equity market’s reaction to another string of disappointing inflation data? A substantial decline initially, in-line with what investors would have expected. But, something unexpected happened thereafter. After the initial fall, equity markets sharply reversed course and finished meaningfully higher. In fact, it was one of the larger “intraday reversals” (when the market starts off higher/lower and finishes lower/higher) for the U.S. market on record. Bonds responded in a somewhat similar fashion, albeit less emphatically. Overall, it was a surprising development that caught most investors off guard given how poorly markets had responded to high inflation readings throughout most of the past year.

There’s no fundamental explanation for this recent turnaround. Moreover, it’s just one day and may turn out to be an anomaly. But, this development left us reflecting on a few learnings we have gleaned over the years, which are all related to some extent. First, when investor sentiment is near an extreme, there may simply be a lack of enough sellers to push prices meaningfully lower. Second, some of the largest daily stock market returns can occur at the most challenging of times, when investors least expect it. Finally, equity markets often bottom on bad news, in anticipation of future improvement.

While I think it’s too early to focus on a sustainable recovery just yet, given that a variety of uncertainties remain: the number and pace of future rate hikes, how fast inflation will be tamed, and continued pressure on commodity prices resulting from the war in Ukraine. The headlines surrounding these events can be distracting to investors and cloud the mind-set of a long-term investor. Despite what headlines may suggest, prolonged volatility doesn’t spell doom for investors that are properly diversified and hold high-quality bonds and financially sound companies with resilient business models.

Looking back, we realize markets never go straight “up” and each year we are presented with a new set of events and challenges. I have attached one of my favourite tables here that I have shared before as a reminder of the events and challenges going back to the 1930s. This is to serve a good reminder that along the way, each year comes with a unique set of challenges. In the moment they can be daunting, however, these often lead to opportunities for disciplined, long-term investors.

Thank you for the trust that you continue to place in my team and I. I know this has been a challenging year and we thank you for your continued patience. Please continue to call us as Shannon, Tom, Brett, and I all stand ready to listen and speak with you. We can also be made available to speak with any family members or friends who may need reassurance during the times.

Enjoy the beautiful Fall weekend here in YYC or wherever you may be.

Best,

Devin