Market Recap - Gemmer Asset Management

The equity markets closed on a surprisingly robust note this week despite some high-profile earnings blowups. Google and Amazon were hit, but Meta Platforms (the old Facebook) really stands out. The stock was lost -25% on Thursday and is now down -70% YTD. Meta has now underperformed the S&P 500 since it came public back in 2012.

On the economic front, the headline report was 3^rd quarter GDP – or at least the first of three estimates of 3^rd quarter GDP. It came in at +2.6% for the quarter after shrinking in the 1^st and 2^nd quarters.

If you dig into the guts of the report, much of the positive growth was driven by exports and government spending. As you would expect, housing was a net negative, and private domestic demand (GDP less inventories, trade and government) ground to a halt, up just +0.1%.

Note how this measure was firmly in the black in the 1^st and 2^nd quarters when GDP growth contracted. This argued strongly for why we weren’t in a recession then. However, if we see a contraction in this measure in early 2023 it probably means we are inching towards a recession.

Will a Housing Swoon = A More Dovish Fed?

The argument for a recession next year gained more credence this week after some of the housing data. For example, September pending home sales were down -10.2% (-4% was expected), the worst monthly drop since April 2020.

And as you would expect in a world of 7% mortgage rates, prices are slipping. The latest Case-Shiller numbers for September showed prices down a little less than -1% for the month. The largest monthly declines (seasonally adjusted) were in San Francisco (-3.7%), Seattle (-2.9%), and San Diego (-2.5%).

The main event next week will be the Fed meeting. Another 75bps hike in rates is widely expected, and the market is placing odds of 84% on just such a scenario.

The moving part will be if the Fed starts to set up for a slower pace of hikes going into 2023. Consensus sees a 50bps hike on December 14^th followed by either a quarter point or half point on February 1^st.

But this is where people differ.

There’s a growing chorus of pundits predicting that the Fed will hike in December and call an audible to see how inflation and the economy evolve in early 2023. This idea that the Fed might signal a ‘pivot’ on Wednesday explains much of Friday’s rally.

This week both the Bank of Canada and the European Central Bank signaled a slower pace of hikes going forward. We shall see if the Fed follows their lead.

Charts We Found Interesting

The table below shows the wealth lost in the stock market this year as a percent of GPD. This is pretty telling. Outside of COVID, this bear market trails only the financial crisis on the tech bust in terms of wealth destroyed.

The chart above would argue for a disinflationary environment in 2023 due to a big negative wealth effect. The latest money supply numbers argue the same thing.

Rental growth is coming off the boil – more signs of slowing inflation?

Interesting chart on where we are seeing the earnings weakness.

China’s 20^th National Congress didn’t pan out too well for equity investors. Hong Kong stocks are close to the 2009 lows.

California is poised to overtake Germany as the world’s fourth-largest economy.

Hard not to wonder what the November cover has in store.

Most of baseball is incomprehensible to me, but apparently a win by a Philadelphia team means Armageddon. No disrespect Philadelphia.

Have a good weekend.

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