We saw three major influences on the markets this week: the midterm elections, the weeklong drama around the collapse of cryptocurrency exchange FTX, and Thursday’s inflation-data releases. Ultimately, the market ended the week strongly. The SPX was up 5.88% for the week, the Nasdaq rose 7.78%, and Treasury yields fell, with the 10-year ending the week at 3.82%, down from 4.16% last Friday.
Monday saw markets rise slightly ahead of Election Day, with investors showing their enthusiasm for the prospect of a Republican-controlled Congress that, alongside a Democratic President, would mean a more frequently gridlocked government – widely believed to result in fewer regulations, lower taxes, and bigger corporate profits – and thus higher stock prices. SPX was up 0.1% and the Nasdaq rose 0.9%. Election Day saw the SPX up 0.56% and the Nasdaq up 0.49%.
Markets slid on Wednesday as the morning after investors saw control of Congress yet to be determined. The SPX fell 2.08%, the Nasdaq declined 2.48%, and the VIX rose to 26.01. Republican hopes for a dominating wave the night before did not materialize. As our US Policy expert Tom Block notes, most expect Republicans will ultimately win control of the House but without the overwhelming majority they had undoubtedly hoped for. After Democrat John Fetterman beat Dr. Oz in Pennsylvania, control in the Senate will depend on the results of a Georgia runoff between Herschel Walker and the Rev. Raphael Warnock, who got just a few votes more than the former football star, but not enough to pass the 50% threshold required by Georgia law. Senate races in Arizona and Nevada also remained too close to call as of Friday.
On Thursday, better-than-expected inflation numbers sparked one of the biggest single-day rallies since the pandemic began, with the SPX up 5.54% and the Nasdaq shooting up 7.35%. The two-year and 10-year Treasury yields each fell about 30 bps.
That rally extended into Friday, with the S&P500 and Nasdaq both rising (1.1% and 2.1%, respectively).
Crypto was sniffing out the bottom before this week, and ordinarily optimists might have had reason to hope for an imminent return to an upward slope – if not for the week’s dramatic events surrounding FTX. The cryptocurrency exchange’s now-departed CEO, SBF, is unlikely to find any allies in Washington, despite his previous efforts in the nation’s capital. Neither party is sounding particularly sympathetic, with House Financial Services Chair Maxine Waters (D-California) calling for increased crypto oversight, “Now more than ever, it is clear that there are major consequences when cryptocurrency entities operate without robust federal oversight and protections for customers,” she said. Ranking Republican on the Financial Services Committee Patrick McHenry (North Carolina), in line to become the Chair if the Republicans take control of the House as expected, did not sound any less severe this week: “The recent events show the necessity of Congressional action. It’s imperative that Congress establish a framework that ensures Americans have adequate protections while also allowing innovation to thrive here in the U.S.”
FTX on Friday announced it had filed for Chapter 11 bankruptcy. During the process, FTX will be overseen by John J. Ray III, a veteran liquidator who once helped to oversee the liquidation of Enron.
Disney plummeted after reporting quarterly results on Tuesday that missed Street top-and bottom-line expectations by a wide margin, and the House of Mouse also tempered forecasts for its next fiscal year (which runs from October 1 to September 30). On the plus side, Disney+ beat expectations for subscriber growth and record revenue from its parks, experiences, and products segment (though operating income fell short of expectations due to higher costs.)
As rumored earlier in the week, Meta on Wednesday announced it would lay off 13% of its workforce, about 11,000 employees. In a letter to employees, Mark Zuckerberg said the Facebook parent would also extend its hiring freeze through Q1. Meta’s stock, which had already risen significantly when the rumor began spreading, rose as much as 6.8% when it was confirmed. The Meta staff cuts, combined with the recent round of layoffs at Twitter and rumors that Salesforce quietly laid off 1,000 employees last week, have some observers talking about a bloodletting in the Tech sector.
Elsewhere in the world
China’s quest for zero COVID continued to focus on Guangzhou, with an estimated 5 million residents locked down as of Wednesday. In Beijing, 118 new infections – a minuscule number by global standards – also caused a new round of mass-testing and a limited lockdown of some buildings and neighborhoods in the capital city. On Friday, Beijing announced a slight loosening of its quarantining policies, though the country’s National Health Commission insisted that the country was not even close to “relaxing prevention and control, let alone opening up.” Still, investors, desperate for even the slightest sign of progress back to normalcy, drove the Hang Seng up 7.74% and the Shanghai Composite up 1.69% in response to the revised quarantine rules. Oil prices also rose 3% in response to the news (and anticipated higher demand), with Brent crude futures rising 1.9% and US WTI crude gaining 2.3%.
Top Russian military officials announced on Wednesday that Russian forces would withdraw from Kherson City, a vital Black Sea port and the gateway to Crimea. Ukrainian officials initially expressed doubt about the sincerity of the announcement, but there was jubilation in the streets on Friday after Ukrainian forces entered the city and again raised their blue-and-gold banner. Kherson was symbolically important as the first major city Russian forces took over after their February invasion, and just a month ago, Vladimir Putin had declared Kherson to be a part of Russia “forever.” Russian forces remain in control of much of the region surrounding the city, however.
Sir Evelyn de Rothschild passed away on Monday at the age of 91. The scion of the storied banking dynasty was instrumental in the privatization of the UK’s nationalized oil, gas, and steel industries, leading the way toward a similar privatization of its coal industry and of British Rail.
These markets have been tenuous and harrowing. While Thursday’s rally was encouraging and while we take great pride in keeping you a step ahead of the crowd by rolling our sleeves up and getting under the hood on CPI, if you re-examined the aftermath of the Tech Wreck you will see that the Nasdaq had days of 6% up or more, you would have been wrong fourteen times if you assumed the bottom was in. There are plenty of reasons to be optimistic in the long haul, but war, plague, and a deterioration of global cooperation are all weighing heavily on markets.
Remember that if the market has a P/E of 17 then about 94% of the value is comprised of future earnings. When the future becomes less certain, so does the certainty about these future earnings. Then aside from all the prodigious risks we are facing, we are also facing pressure on multiples from the high rates after an extended period of low rates.
You might be wishing you could just set and forget your money with one of the best active managers in the world. Even here, the risks of self-deception and buying high and selling low can eradicate the good work of even the best active managers. Peter Lynch used to manage Fidelity’s Magellan Fund and had one of the best consistent track records of any active manager. He was prolific and he consistently beat the market and produced a stunning 29% annual return. Here’s the thing about mutual funds though, the individual investor still decides when to buy and sell their shares.
So, had they done nothing and spared themselves from their own emotionally driven mistakes they could have shared in Mr. Lynch’s prodigious returns. The great active investor himself pointed out that the average return of his investor was less than 25% of what he was able to deliver. Money would flow out during temporary setbacks and then chase the gains when he started to outperform. In doing so most investors missed the crucial upswing and the average return of a Magellan investor was only 7%, much closer to the long-run return of the market. So, remember as counterintuitive as it may seem, sometimes doing nothing is the most profitable approach to markets. Particularly if you don’t have algorithms on your side. The miracle of compounding has rewarded investors over time through all the risks and crises of previous decades and this will almost certainly continue.
Finally, as we mark Veteran’s Day in the United States, we pay tribute to all of those who have served our country and the world, and all of those who are serving today. Let us honor our heroes with both words and actions, ensuring that those who have sacrificed for freedom are always taken care of.