Bye bye, October rally. The November chill is here: Morning Brief

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Friday, Nov. 4, 2022

Today's newsletter is by Julie Hyman, anchor and correspondent at Yahoo Finance. Follow Julie on Twitter @juleshyman. Read this and more market news on the go with Yahoo Finance App.

Avid watchers of Yahoo Finance’s live programming might have noticed a theme emerging over the past week regarding the Federal Reserve meeting — beware.

On Monday, the Dow was coming off of its best month since 1976. The S&P 500 and Nasdaq had bounced off their lows, albeit with smaller rallies. “Hopium” was in the air, in part based on optimism that the Fed would show signs of drawing its tightening cycle to a close.

But analysts urged caution in the lead-up to the Fed's interest rate decision on Wednesday.

“We believe the October rally in risk assets is really on shaky ground,” BlackRock Global Chief Investment Strategist Wei Li told us on Monday. “Because markets previously were looking for a dovish pivot from the Fed, and then they were looking for a pause from the Fed, and now markets are getting excited about just the pace of rate hikes decreasing.”

The October rally could be coming to an end. Image: Getty (Stefan Cristian Cioata via Getty Images)

“I think it may take longer than expected” for the Fed to “pivot,” or stop raising rates, Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments, told us on Tuesday. She predicted that realization would send stocks lower.

Li said that in addition to a Fed letdown, a weakening economy and lackluster earnings could pressure equities. “A lot of the bad news is really starting to come together, and they have yet to be reflected in market pricing," Li said. "Earnings forecasts are coming down, but not down enough. Next year, for the S&P 500, we’re still talking about mid- to high-single digit growth for U.S. earnings. That is really not aligned with our expectations for a recession.”

Jennifer Lee, senior economist at BMO, warned viewers about consumer spending on Wednesday: “I think consumer spending has already started to slow. And it will slow further. We are still looking forward to consecutive quarters of negative GDP growth in the new year. And contributing to that will be slower consumer spending.”

This commentary came before Fed Chair Jerome Powell’s press conference on Wednesday, which reflected the predictions of these strategists and economists. But it seemed the market hadn’t yet priced in the likelihood that the central bank wasn't ready to slow down on rate hikes.

“It is very premature, in my view, to think about or be talking about pausing our rate hikes,” Powell said.

The S&P 500 responded by dropping by 2.5%, and continued its descent on Thursday.

Investors haven't had time to catch their collective breath post-Fed before this morning’s October jobs report. If this week’s action is any indication, a better-than-forecast report could continue to hit stocks.

On Wednesday, a higher number from the ADP jobs reading triggered a drop in futures. That’s because a healthy job market means Americans still have money to spend, and that they’ll continue to pay higher prices. That in turn makes the Fed’s job of tamping down inflation even harder — meaning the interest-rate hiking cycle could last longer.

“Inflation is high enough [that] the only way the Fed can get back to goal is slowing demand so much that it creates a very high probability of recession,” Vincent Reinhart, chief economist and macro strategist at Dreyfus and Mellon, told Yahoo Finance. “Yes, six to nine months from now we will be in a recession.”

What to Watch Today

Economic calendar

8:30 a.m. ET: Change in Nonfarm Payrolls, October (195,000 expected, 263,000 during prior month)
8:30 a.m. ET: Change in Private Payrolls, October (200,000 expected, 288,000 during prior month)
8:30 a.m. ET: Change in Manufacturing Payrolls, October (12,000 expected, 22,000 during prior month)
8:30 a.m. ET: Unemployment Rate, October (3.6% expected, 3.5% during prior month)
8:30 a.m. ET: Average Hourly Earnings, month-over-month, October (0.3% expected, 0.3% during prior month)
8:30 a.m. ET: Average Hourly Earnings, year-over-year, October (4.7% expected, 5.0% prior month)
8:30 a.m. ET: Average Weekly Hours All Employees, October (34.5 expected, 34.5 during prior month)
8:30 a.m. ET: Labor Force Participation Rate, October (62.3% expected, 62.3% during prior month)
8:30 a.m. ET: Underemployment Rate, October (6.7% prior month)

Earnings calendar

Berkshire Hathaway (BRK.A, BKR.B), Duke Energy (DUK), Dominion Energy (D), Hershey (HSY), HondaMotor (HMC), Cardinal Health (CAH), Royal Caribbean (RCL), Cboe Global Markets (CBOE), Nomura (NMR)