The Final Push

We are almost reaching the end of one of our generation's most tumultuous financial years. While we have been shaken by a multitude of geopolitical factors and market clashes, it seems that 2022 might eventually close on a positive note, gearing our hopes up for 2022.

As of November 25, 2022, the most recent weekly result shows that the S&P 500 has acquired more than 12 percentage points since hitting a recent low in the middle of October. Furthermore, the Dow has gained more than 19% since it hit its low point in the middle of October. Likewise, the NASDAQ 100 (QQQ) index has gained slightly over 12 %.

Tom Lee, the head of research at Fundstrat, considers that the market might see a vertical rise similar to the one that occurred in 1982 and perhaps break certain records if inflation continues to fall at a quicker rate than anticipated by the Federal Reserve. According to him, the S&P 500 index saw such a dramatic recovery in 1982 that it ended a bear market that had lasted for 27 months in only four short months.?

Without a doubt, the expectations of lower inflation have encouraged investors to wager that the Federal Reserve would not need to raise interest rates as much as was previously forecasted. This has generated an increase in the relative worth of future profits for corporations.

According to statistics made public on November 10, 2022, the monthly inflation rate in the US for October 2022 came in lower than the rate projected to be 8.0 %. October's inflation rate came in at 7.7 %, down from 8.2 % in the previous month. If inflation remains subdued, the Federal Reserve may be dissuaded from taking the most strident approach to raising interest rates. It has already increased its key lending rate to a range between 3.75% and 4%, up from very close to zero in March.

Uncovering the Impact of Inflation

Ronald Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman.” While there is much talk about rising inflation levels, it is important to understand the dynamics behind inflation.

Overall, the primary factor for this year's decline in stock prices has been the Federal Reserve's attempts to rein in inflation via higher interest rates, and the expectation that the most severe price increases have passed has helped to maintain the current turnaround. The most significant increase occurred on November 10, when the S&P 500 rose by 5.5 % on news that the United States had announced a more moderate inflation rate than experts had anticipated.?

Periods of high inflation (particularly if they come as a surprise) will produce increased levels of uncertainty and may deter businesses from making choices involving hazardous investments. Since this uncertainty may result in slower economic development and business profitability, shares may seem less appealing. During times of economic unpredictability, investors may choose to reduce their exposure to equities and increase the proportion of their portfolio invested in safer assets, such as index-linked government bonds or tangible assets that maintain their value as real estate and gold.

Because inflation lowers the purchasing power of a dollar's worth of profits, it may be challenging for the market to determine the true value of the firms included in market indexes at any one time. In addition, profitability may be negatively impacted when firms respond to increasing pricing for supplies, inventories, and labour. Because of this, stock values are subject to change, contributing to market volatility.

Are We on the Right Track?

Since the inflation rate was announced to be significantly lower than expected on November 10, we have witnessed some positive momentum for the financial markets. What lies ahead for the stock market in December may be partially indicated this week in the critically important payrolls report for November and the personal consumption expenditures index. But it seems like the odds are now in our favour!

However, if we are truly on an ascendent trajectory, it means that now is one of the best moments to invest and choose your next steps wisely to maximize the benefits of the upcoming financial growth.

If you want to talk about the available options, please feel free to drop me a message

Luke