Inflation cooled in October, but prices on energy and food remain at near 40-year highs. With just one data point signaling relief, investors should remain cautious until a more consistent trend takes hold — and consider real assets to potentially stabilize real return erosion.
Global markets were broadly higher last week, as October’s better-than-expected US inflation report spurred a sizable rally. Tech and communication services led US sector performance, and both closed the week over 9% higher. The rally extended to gold, as the commodity had its best week in two years in hopes that central banks might scale back on hawkish policies.
No ‘Red Wave’ in US Midterms
Democrats managed to keep the expected “Red Wave” at bay in last week’s midterm elections. Several hotly contested races were finally called, allowing Democrats to retain control of the Senate. Control of the House remains to be seen, though it currently leans in the Republicans’ favor.
Significant Cuts at Twitter
Just days after laying off nearly 50% of Twitter’s staff, Elon Musk cut another 4,400 contractors from Twitter’s payroll.1 Former employees have already filed a lawsuit claiming that Twitter has reneged on promised severance pay.2
Another Crypto Company Falls
Cryptocurrency exchange FTX filed for Chapter 11 bankruptcy on Friday, following a liquidity crunch and allegations of fraudulent use of client assets.3
China Eases COVID Restrictions
China has begun to ease COVID lockdown measures. Quarantine for close contacts has been shortened by two days, and they will stop actively tracing secondary contacts.4
US Retail Reports
Q3 earnings season winds down with a slew of notable big-box retailers reporting: Walmart, Target, Home Depot, Lowe’s, Macy’s, Kohl’s and TJX. Wednesday’s retail sales report for October is our last look into consumer spending before the holiday shopping season gets underway.
Is Inflation Cooling? Or Is It Just a Blip?
Recent economic data has been a mixed bag. October CPI readings came in better than expected.5 But this cooling of inflation warrants a cautionary reminder that one data point does not make a trend.
Prices still sit near 40-year highs, with significant upward pressure on energy and food, offering little hope for relief in the immediate future. Energy prices are likely to be supported by increased winter demand, dwindling strategic reserves, and lagging production.6
While the unemployment rate did increase to 3.7%, job growth proved stronger than expected, with non-farm payrolls increasing 261,000 versus estimates of 200,000.7 There is little evidence to suggest a sizable shift in policy direction. And the University of Michigan’s main consumer sentiment gauge has retreated to a four-month low, adding support to the idea that inflation is not yet in the rear-view mirror.
Implementation Idea: SPDR® SSGA Multi-Asset Real Return ETF
Markets remain in flux. Investors should resist making premature portfolio allocation shifts predicated on favorable point-in-time indicators. A diversified portfolio of real assets may help to stabilize real return erosion as consistent inflation cooling remains to be seen.
Quarterly Asset Class Correlations With CPI Over the Past 25 Years
Exposure to real assets that are historically positively correlated with inflation, such as the SPDR® SSGA Multi-Asset Real Return ETF (RLY), may continue providing investors insulation from elevated prices as future inflation readings reveal a more thorough picture of the economy’s direction. And RLY is the best performer in its US ETF Morningstar peer group year to date, up 9.82%, and one of only two funds with a positive cumulative return this year.8
RLY Standard Performance as of September 30, 2022
1 CNBC, Twitter cuts a large number of contract workers without giving internal teams a heads up, November 13, 2022. 2 Business Insider, Elon Musk failed to give laid-off Twitter employees previously promised severance packages, lawsuit alleges, November 11, 2022. 3 CNBC, Sam Bankman-Fried steps down as FTX CEO as his crypto exchange files for bankruptcy, November 11, 2022. 4 Reuters, China shortens quarantines as it eases some of its COVID rules, November 11, 2022. 5 US Department of Labor, November 10, 2022. Consumer Price Index rose 0.4% in October, below economist expectations of a 0.6% increase. 6 US World Bank Commodity Markets Outlook, October 2022. 7 US Department of Labor, November 4, 2022. 8 Morningstar, as of November 15, 2022. Peer group = Global Allocation as defined by Morningstar. The peer group consists of 18 US-domiciled ETFs.
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