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Investors Rejoice: Inflation Tamed?

What a week, huh?  All it took was an election and a CPI report to cause the markets to shoot higher.  All three major indices will close higher this week, with the clear winner being the Nasdaq which looks to finish the week 8% higher.  We haven’t seen this kind of week since 2020 and frankly, the Nasdaq was long overdue for a reversal.  Having said that, we are not out of the woods.  I’ll get to why investors reversed course this week and the markets rose, but there are still thunderclouds in the distance as potential recession fears continue to simmer.  Let’s just enjoy this momentous week and hope the optimism carries us through the end of the year.

Of the two events that occurred this week, the one that has the biggest consequence is the election.  As of today, we still do not know which party controls Congress, but if pundits are correct we should expect divided government for the remainder of President Biden’s term.  That isn’t necessarily a bad thing.  In recent history, stocks have only gone up after midterm elections.  In the year following every midterm election since 1950, the S&P 500 has risen no matter which party won.  Even better news is that a divided government, which would happen if the GOP retakes the House, delivers the best market results.  Data going back to 1932 shows average annual S&P returns of 13% when there’s a GOP-controlled Congress under a Democratic president, compared to 10% when Democrats have both, per RBC Capital Markets.  While there is some debate as to why partisan gridlock can be advantageous for business because it minimizes the chance of major changes to tax or other laws that impact companies.  It also doesn’t hurt to have the uncertainty of the election in the rearview mirror.

As for the second event this week, markets went bananas after the consumer price index (CPI) was released on Thursday.  The report showed that inflation cooled a little more than expected last month.  The best unattributed quote I came across is that “like edibles, interest rate hikes take a while to kick in.  But when they do, you can definitely feel the effects.”  This report is a hopeful sign that Fed Chair Jerome Powell’s rate hikes, paired with easing supply chain issues, are starting to cool off inflation.  While CPI came in at a still lofty 7.7%, core CPI, which some believe is a better gauge of inflation, saw a big drop from 0.60% in August and September, to 0.30% in October.  While food and energy prices remain high, price declines were led by apparel and used cars.  Even in the slower moving parts of the economy, we saw prices begin to fall in airfares, sporting ticket events, medical care, and even rental and housing costs.  Investors took this as a sign that the Fed will begin backing off big interest rate hikes, and despite an otherwise hawkish Fed, it seems likely that interest rate hikes will indeed slow in the coming months.

One development that hasn’t made a big splash yet is the trend toward more layoffs, particularly in the technology sector.  This week Meta, previously known as Facebook, announced it will be laying off 11,000 workers or roughly 13% of its workforce.  Elon Musk fired half the employees at Twitter shortly after taking control of the company.  Other tech companies making rumblings they too will follow suit including Amazon, Microsoft, Salesforce, Stripe, Lyft, RedFin, Twilio, DocuSign, HelloFresh, Opendoor, Peleton, and Noom. And those not directly reducing headcount are freezing hiring.  Many of these companies expanded significantly in the aftermath of the pandemic and the boom that took place last year.  They are now facing a new landscape and are having to make difficult decisions to reduce spending and control costs.  We should look for this trend to accelerate in the months ahead.

In closing, I’m going to share a story of what not to do when you become CEO or CFO of the company you work for.  I learned this week, the CFO of Tyson Foods was arrested less than six weeks after taking the reins.  You’re probably thinking of financial shenanigans, right?  Maybe embezzlement or an unsanctioned relationship with a subordinate?  You’d be wrong.  He was arrested on Sunday for public intoxication and criminal trespassing.  A police report indicates the 32-year-old CFO allegedly drunkenly broke into the home of a woman he didn’t know and passed out in her bed.  I purposely didn’t mention his name, but if you were wondering it is John Tyson.  I’m sure his family name and father being chairman of the board has nothing to do with how he managed to land his position in the company.  Now you know. 

Bruce J. Mason, MBA