Market Note — November 11, 2022

The market exploded higher yesterday after a more subdued CPI report than expected. It was an impressive day as those that were betting that inflation would print a higher number rushed to cover their shorts and buyers, despite what Chairman Powell has reiterated a number of times, stepped in expecting the numbers to convince the Fed to pivot or pause. The rally took the S&P up through resistance at 3900 and it is now testing resistance near the 4000 level. While the rally may still have legs, it will very likely pause here or at the falling 200 day moving average (some 2% above current levels). The rally still has the hallmarks of a bear market rally and, while impressive, does not change the downtrend that began in January. Days like yesterday don’t happen in bull markets. It should be noted that in the bear market of 2000-2002, there were 14 up days of 6% or more. And since you are asking, you would have been wrong 14 times if you thought the bottom was in. Similarly in the bear market of 2008, there were 17 up days of 4% or more (there were 2 days with gains over 10%) and in all 17 cases, lower lows were the result. To be sure, this bear market will end but it is much more likely to end as a process rather than as an event. Emotions should not play a role in investing and astute investors would be wise to let the dust settle before getting too excited about the rally. Speaking of emotions. They were running high on Tuesday night as election results poured and/or trickled in. While it continues to look like the markets will get a split government, the night was underwhelming for Republicans. Democrats outperformed as Republican election prognosticators will spend the next 2 years evaluating what went wrong. The markets sold off a little on Wednesday when market expectations of a Red Wave were replaced with a Red Ripple. Absent a big surprise in the remaining House races, Republicans look to have a slim majority there. Arizona, Nevada, and Georgia will now determine the fate of the Senate. From a market perspective, the Senate races will hold less significance as long as the House moves to Republican rule. A little bit of uncertainty will remain until all the votes are counted. Concerning uncertainty, after the delays in 2020, it does seem like states would have put in place systems to count votes in a timely manner! The delays do nothing but add to conspiracy theories and a general distrust of the system – it should be avoided and fixed before 2024. Do better. We made a few small changes to our portfolios around the margins. In our view, while the rally could extend into December, the big day yesterday captured much of the gains to be made going into the end of the year. Of course that could change if the CPI report released in December continues to show a decline in inflation and the Fed changes its tone. Interestingly, the CPI report will be released the day before the December 14th Fed meeting so that will be a huge week. While the Vols fell flat last weekend, their playoff hopes remain. It has been a long time since Saturdays in November and December meant as much to me. Bundle up, thank a veteran and have a great weekend.