Stocks rally as inflation eases

5th November – 11th November 2022 | Another week in the markets

S&P 500	Nasdaq	VIX	DJIA	Russell 1000	NYSE
3,992.93	11,323.33	22.52	33,747.86	2,195.85	15,352.69
5.90%	8.10%	-8.27%	4.15%	6.06%	4.42%
Nifty 50	Gold	Silver	Brent crude	USD-INR	EUR-INR
18,349.70	$1,774.20	$21.80	$95.76	80.58	83.45
1.28%	5.25%	4.21%	-3.03%	-1.80%	2.14%

Source: MarketWatch

Hello Saturday,

This week US stocks rally as inflation eases, the dollar index falls, and massive tech layoffs continue in order to cut costs and appease investors. 

• Inflation in the US eases to 7.7%, the lowest annual inflation reading since January and lower than October estimates
• US midterm election results are still up in the air as Republicans inch closer to victory, threatening President Biden’s fiscal policy plans, including tax hikes and public spending
• Cryptocurrency exchange FTX’s collapse owing to an $8 billion hole in the balance sheet sparks turmoil in the wider cryptocurrency markets 
• Meta lays off 11,000 employees as it joins other Big Tech companies in cost-cutting measures while Amazon is considering layoffs to improve investor sentiment as well
• Treasury bonds’ yields plummet as inflation slows at a greater-than-expected pace causing the dollar index to fall more than 3% this week

Taking stock | Down but not out | Whose house party? | WTFTX | The axe effect | Breaking bonds | Invest wisely

Taking stock

On Thursday, S&P and Nasdaq rallied after October’s inflation data left investors optimistic that the Fed would be less aggressive with future interest rate hikes. Both indexes saw their biggest daily percentage gains in over 2.5 years as October’s Consumer Price Index (CPI) at 7.7% turned out to be the lowest annual inflation reading this year. All the major indexes posted a winning week – S&P gained 5.90%, Nasdaq jumped 8.10%, and Dow Jones climbed 4.15%. 

Down but not out

Inflation in the US slowed to 7.7% in the year to October. The Consumer Price Index (CPI) is down from 8.2% in September to the lowest annual inflation reading this year. 

After the release of this data on Thursday, the stock market rejoiced since slowing inflation could mean the Federal Reserve dialling back its aggressive interest rate hikes. So, does this indicate the beginning of the end of the painfully high inflation levels and contracting monetary policy? Maybe, maybe not. Despite this slowdown, the inflation rate is well above the Federal Reserve’s 2% target, i.e., the slowdown, although greater than expected, isn’t fast enough yet. Also, when you look at it on a monthly basis, prices rose by 0.4%, which is the same as the previous month’s increase. So, while the Fed may not go for another 75 basis points in December, a 50 basis points hike can still be expected. 

Whose house party?

US midterm election results are still a tossup, with Republicans inching toward a House majority. What does this mean, and how does it impact the economy? Midterm elections in the US elect new members of Congress, the legislative branch and governing body of the US consisting of 535 members. Any act or law to be passed by the President first needs to be approved by Congress. Midterm elections are thus crucial because they can change the fiscal landscape of the country fundamentally with policy decisions depending on which party gains control of Congress.

President Biden, who belongs to the Democratic party, recently suggested imposing a windfall tax on oil companies making huge profits owing to record-high gas prices. However, if Republicans win, such tax hikes are unlikely as they are typically not in favour of government intervention through tax hikes. Other important fiscal factors like the federal debt limit, government spending, and social security programs will also be impacted. 

WTFTX

An $8 billion shortfall in its balance sheet meant FTX, one of the leading cryptocurrency exchanges, is at risk of bankruptcy. On Tuesday, Binance, FTX’s competitor, offered to buy the company and bail it out. However, the very next day, it pulled out of the deal. FTX’s native token FFT currency has fallen about 85% in the past week to $3.40, while the founder Sam Bankman-Fried’s net worth has plunged by 94%, from $16 billion to $1 billion. FTX’s liquidity crisis has only created more turmoil for the cryptocurrency markets – bitcoin fell to two-year lows, Robinhood shares dropped more than 20%, and Coinbase lost more than one-fifth of its market capitalisation this week. 

The axe effect

Massive tech layoffs continue amidst the economic slowdown. On Wednesday, Facebook parent company Meta announced that it will be laying off 13% of its workforce, which is over 11,000 employees. In addition to its biggest-ever job cut, the company will be extending its hiring freeze, reducing perks, scaling back budgets, and decreasing its real estate footprint to cut costs. Meta, of course, is not alone. Other major tech companies, including Twitter, Lyft, and Coinbase have had several rounds of layoffs this year. And on Thursday, Amazon reported that it’s reviewing its unprofitable businesses to cut costs.

While such massive layoffs are tragic for employees, the markets are happy about these cost-cutting measures. For instance, after Amazon’s announcement on Thursday, its shares were up 11%. During economic downturns, investors tend to look favourably at layoffs since lower costs translate to higher profits. Hence, such layoffs may end up stabilising tech stocks and improving investor sentiment at long last.

Breaking bonds

Treasury bond yields, sensitive to Fed policy changes, sank sharply on Thursday after inflation in October slowed down more than estimated. The two-year Treasury bond yield saw its biggest one-day decrease since 2008, falling 0.25% to 4.33%. This drop in Treasury yields triggered the dollar to plummet significantly on Thursday while other currencies, such as the pound and the yen gained. Along with currencies and stocks, the commodities market also rallied as investors moved to risk assets.

Invest wisely 

The last few months have been a wild ride for markets, and with global recession predictions, geopolitical tensions, and high inflation levels, that’s likely to continue. Hence, it’s crucial that you make your investment portfolio more resilient to market volatility by undertaking diversification. You can diversify across asset classes, such as equity and debt, along with diversifying across geographies. Just like no two asset classes have identical risk-return profiles, no two countries’ markets are perfectly correlated. Download the Appreciate App to invest in high-performing global stocks and ETFs to diversify your portfolio today!

Warm regards,
Another week
in the markets