No pain, no gain.

The idiom began as a catchphrase by Jane Fonda in her 1982 video series of aerobic workouts. She would say, “No pain no gain” and “Feel the burn” as she put her viewers through some painful exercises.

So, what does this have to with a Market Recap?

A quick scan of recent headlines would indicate that there is more pain to come as the Federal Reserve continues their effort to fight inflation, which remains near levels from 1982.

Bullard Sets Tone for Fed Officials Signaling Hikes Will Roll On —Bloomberg

Fed’s George Says Higher US Savings May Also Mean Higher Rates Needed —Bloomberg

Fed Officials Are Focused on Tackling High Inflation, Mester Says —Bloomberg

NY Fed's Williams: 'Still more work to do' to bring down inflation —Yahoo Finance

The argument for slowing the pace of rate hikes:

Consumers and Inflation:

The year-over-year (YoY) US Inflation Rate cooled off by 0.4 percentage points to 7.8% in October, and YoY US Core Inflation fell by the same amount, down to 6.6%. The month-over-month (MoM) US Consumer Price Index was up 0.44% in September, and personal spending increased by 0.84%. Lastly, the Federal Reserve issued another 75-basis-point rate hike at its November 2nd meeting, bringing the Upper Limit Target Federal Funds Rate to 4%.

Production and Sales:

November’s US ISM Manufacturing PMI slipped for the sixth straight month to 49.00, marking the first time since May 2020 that the ISM Manufacturing PMI fell into contraction territory (below 50.0). On the plus side, US Retail and Food Services Sales logged its best month in the last eight, rising 1.3% in October. Inventories are also pushing toward normal levels. The US Retail Trade Inventory/Sales Ratio was 1.25 as of September, well below its historical average of 1.50 but 14.7% higher than its April 2021 low.

Housing:

After a double-digit percentage decline in September, US New Single-Family Home Sales increased 7.5% MoM. In October, 632,000 new homes were sold nationwide, 8.3% fewer than the same time a year ago. Existing Home Sales painted a bleaker picture, however—October’s 5.9% decline marked the ninth straight monthly drop for sales of existing homes. The slowdown translated into the fourth consecutive month of declining home prices, with the US Existing Home Median Sales Price falling 1.1% to $379,100. On the bright side for potential new buyers, 15-Year and 30-Year Mortgage Rates cooled off to 5.76% and 6.49%, respectively, after recently reaching levels not seen since the Great Financial Crisis.

Commodities:

The price of gold jumped 6.3% MoM to $1,751.90 per ounce as of November 25th but is still down 3.0% year to date. Both WTI and Brent oil prices fell by double-digit percentages in November. The spot price for a barrel of crude settled at $77.10 at the end of November, down 10.5% from last month’s level of $86.54, and Brent tumbled 10.9% to $93.07. Drivers ought to appreciate the lower oil prices, as the average price of regular gas fell 21 cents in November to $3.65 per gallon.

This is encouraging to the Fed; however, one thing remains stubborn—a stronger than expected employment report:

Employment:

October’s unemployment rate clocked in at 3.7%, bouncing off its 50-year low of 3.5%. The labor force participation rate dipped 0.1 percentage point to 62.2%, now 1.2 percentage points below its February 2020 high. In November, 263,000 jobs were added, topping non-farm payroll expectations of 200,000 but paling in comparison to last November’s gain of 647,000.

Still, the Federal Reserve looks more comfortable shifting to more moderate rate hikes:

US Economy Shows Signs of Slowing as Fed Hikes Filter Through —Bloomberg

Fed minutes show 'substantial majority' support slowing pace of rate hikes —Yahoo Finance

Powell signals 0.50% rate hike in December, citing need to 'moderate' pace —Yahoo Finance

What to expect into year end and beyond?

The market is watching the Fed like a hawk to see when it pivots. Too bad the Fed is split on what to do —Fortune

Wall Street Economists Split on Whether Fed Cuts Rates in 2023 —Bloomberg

Fed Could Be Pushed by Overheated Wages to Higher Peak Rates —Bloomberg

Fed Staff Warn Chance of Recession in Next Year Is Now Near 50% —Bloomberg

In conclusion, it would seem we are past peak inflation; however, we remain at elevated levels compared to recent history and compared to the Federal Reserve’s target levels. As such, we can expect additional rate hikes that are projected to bring the Federal Funds Rate to around 5%. The Federal Reserve recognizes the pain this is causing and is okay with the possibility of a recession. Their view is that this would be less painful than long-lasting, elevated inflation and will lead to a quicker recovery.

They intend to leave interest rates at a higher level once they are done with raising them, but the equity markets will continue to try to anticipate and predict when rate cuts may begin.

As a result, we can expect heightened market volatility into the new year before eventually coming to terms with our new reality. The same market volatility that can sometimes cause pain can also often reveal opportunity to lead to gains.

The ancient Greek poet, Hesiod, agrees with Jane Fonda and the Fed in the idea of “no pain no gain” and expresses this idea in “Works and Days”:

“Before the road of Excellence, the immortal gods have placed sweat. And the way to it is long and steep and rough at first. But when one arrives at the summit, then it is easy, even though remaining difficult.”

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Monthly Market Recap – November 2022