Climbing the Wall of Worry – November 2022

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The Stock Market climbed “The Wall of Worry” in October, gaining 9-14% depending upon the index.    

The Dow Jones Industrial Average “DOW” closed at 32,861 on Friday October 28, 2022, up 4,000 + points since September 31, 2022, when it closed at 28,725. The stock market is myopically focused on the direction of interest rates and is looking for signs of economic weakness. This weakness may provide the FED cause to ease off from its hawkish stance to a more accommodative monetary policy.  In plain English interest rates may stabilize or decline sooner than previously expected.  So why the swift upswing in the market? What changed?

  1. Stock markets tend to perform well with a divided Federal Government between the Executive Branch (President) and Congress. Most polls during the last few weeks indicate positive momentum has been building for republican candidates. The Republican Party may take over the majority in both chambers of Congress. This is a clear shift from a few weeks ago.
  2. Economic indicators during the past few weeks have shown weakness in the economy. The Purchasing Managers Index “PMI” for manufacturing and services came in at 50.9 and 46.6, respectively. A reading below 50 indicates contraction. So manufacturing is treading water while the service sector may be in contraction or will be soon. This is good news because these data points may add to other data to give the FED cause to ease its hawkish interest rate increase position sooner than expected.
  3. The stock market showed clear signs of being oversold at the end of September on a technical basis and was due for a rally. We track the number of stocks in the S&P 500 index to measure the number of these stock that are priced above their 50-day moving average. When this percentage is below 5% the market tends to rally soon afterwards. Only 3% of the S&P 500 Index stocks were trading above their 50-day moving average at the end of September.

While the recent rally is encouraging, we do not expect the stock market is off to the races in a steady climb upwards. Volatility (upside and downside) will be with us as this interest rate and economic cycle unfolds. 

Richard S. Lawrence, CFA / November 9, 2022

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