Another Fed Hike & Midterm Elections
With only one and a half months to go before year-end, a year of negative performance is coming to a close. And, it has been a tough one. What can we expect for the next six weeks?
Last Wednesday, the Federal Reserve raised the Fed funds rates by 0.75% and continues to speak of aggressive future hikes to control inflation. Consequently, the S&P 500 dropped 2.5% that day, and the Dow Jones Industrial Average (DJIA) declined 505 points (1.5%). In a previous article, I stated that the Fed wants to slow down the economy and essentially reduce consumer wealth (The Fed Gets What It Wants). While this may seem counter-productive to most governments’ goals of increasing overall societal wealth, the Fed has determined that fighting inflation is its main priority right now. This makes sense considering that runaway inflation can have a significant negative economic impact that can be hard to reverse.
Continued Volatility - CPI Data
This Thursday's October CPI announcement will be another catalyst for market volatility. An inflation number that is lower than expected will be viewed positively, whereas an inflation rate that is higher than expected will be viewed negatively. The headline CPI for October is expected to be 7.9%. Regardless of whether the announced CPI data meets expectations or not, the more important factor is the overall trend. In the past three months, headline CPI has been trending down, and a continuation of that trend would be encouraging.
Continued Volatility - Midterm Elections
Volatility may also increase following today’s midterm election results. The Republicans are expected to pick up seats in the House, which will likely lead to policy deadlocks in Congress. Although deadlocks are generally viewed unfavorably, historical data suggests that investment markets view them favorably. Over the last 78 years, the best average S&P 500 return occurred under a democratic president operating with a split congress*. If the Republicans take the House under President Biden, we’ll see if this trend continues.
Market prices and volatility are influenced by many factors, and the October CPI data and midterm election results are just two them. Investors may feel anxious about inflation and election risks, and watching these factors drive portfolio volatility may feel very uncomfortable. Knowing your assets are invested in the right investment strategy for your goals will help in these volatile periods.
*Forbes, “Here’s What Happens to the Markets If Republicans Take Congress in November”, Jan 19, 2022
Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm with offices in Santa Monica and San Diego, CA serving clients throughout Southern California and the United States.
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