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Easing inflation helps buoy markets

Published on 11-14-2022

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Developing gridlock in Washington seen as a positive


One step forward, two steps back. Or, occasionally, two steps forward, one step back, as we saw last week.

Last Wednesday, the broad market was down 2% as fears of a meltdown in the cryptocurrency market rattled investors. On Thursday, stocks scored their biggest one-day gain since 2020, with indexes up about 5% on average (some more, some less).

That’s the story of the stock market this year. A long march down, with occasional rallies, along the way.

But that jerky downward trend may – and I repeat may – be coming to an end.

Thursday’s big rebound was triggered by good news on the inflation front. The U.S. Consumer Price Index rose at an annual rate of 7.7% in October compared with 8.2% in September. That result was better than expected and the smallest monthly advance since the start of the year.

The hope is a slowing inflation rate will encourage the Federal Reserve Board to ease back on the interest rate throttle. The Fed has one more meeting scheduled for this year, in mid-December. Right now, opinion is divided on whether to expect an increase of 0.50% or 0.75%. A shift to the lower rate would be interpreted as a signal that the Fed feels the worst has passed and rate hikes in 2023 will decelerate. That would be great for stocks but even better news for bonds.

This year has been the worst for bond markets in 40 years. As of Nov. 10, the FTSE Canada Universe Bond Index was down 11.57% for 2022. That’s about double the year-to-date loss on the S&P/TSX Composite. Every bond category has been hammered, even usually safe short-term bonds, which have lost 4.32%. Real return bonds, which are supposedly inflation-protected, are down 14.63% year-to-date.

The bond market won’t recover until the central banks stop pushing rates higher, or at least indicate the end of tightening is near. That won’t happen until they are satisfied that the inflation genie is being dragged back into the bottle.

More gridlock for Washington

Markets are also dealing with the still uncertain outcome of the U.S. mid-term elections. As I write, it appears the Republicans will emerge with a narrow majority in the House of Representatives. The Democrats retained control of the Senate with 50 seats. A Dec. 6 run-off election in Georgia will determine only whether the seats will be split 50-50, with Democrat Vice President Kamala Harris carrying a tie-breaking vote, or whether Democrats win a majority of 51 seats.

Whatever the outcome, it appears Washington is headed for gridlock – or, more accurately, even more gridlock than usual. Assuming the Republicans end up controlling at least one branch of Congress, it will be extremely difficult for President Joe Biden to win passage of any new spending initiatives. On the other hand, Republican budget cutters, who want to slash everything from entitlements like social security to aid for Ukraine, face the obstacle of Mr. Biden’s veto pen. There are ways to override vetoes, but the Republicans don’t have the votes to do it.

Some observers think this is the best course for the U.S. economy. “Gridlock is good from a market perspective because of the fact that we don't have to worry about any major tax reform or major regulations over the next two years,” Key Advisors Group co-founder Eddie Ghabour told Fox News.

But gridlock could quickly turn sour if looming partisan battles over such issues as the debt ceiling result in stalemates that could see the U.S. government threatened with default or forced to shut down operations, as has happened before. Wall Street won’t like that one bit.

As I said at the outset, two steps forward, one step back – or maybe the reverse. Time will tell.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to

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Notes and Disclaimer

Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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