Stocks ripped higher in October after investors shook off a bad inflation report and got more hopeful that the Federal Reserve would soon pivot from its hawkish policy that has sent stocks lower all year long.
However, if there is anything investors have become accustomed to lately, it's market volatility. The market has turned bullish one month, only to turn bearish the next month, as a good amount of uncertainty remains in the environment.
While nobody knows what the future will hold, there are three things in the first half of November that have the potential to extend the market's rally.
1. The jobs report
The U.S. Labor Department will release October jobs data on Friday morning. The labor market has remained remarkably strong amid the Fed's large interest rate hikes and lots of inflationary pressure.
Non-farm payrolls increased by 315,000 in August and by 263,000 in September, yet the unemployment rate fell from 3.7% to 3.5% in the same time period as the overall workforce shrunk and the number of discouraged and part-time workers also declined.
Image source: Getty Images.
The hot labor market has driven up wage inflation, which the Fed believes is contributing to broader inflation, so Fed Chairman Jerome Powell is hoping to see some deterioration in the labor market to show the Fed that inflation is easing.
There have been signs of this. New data from the Labor Department showed that wage growth in the private sector slowed in the third quarter compared to the second quarter. Furthermore, the consensus estimate among economists for jobs added in October is 190,000, which on its own would be a sharp decline from the prior month.
It's always a little tricky to predict how the market will determine data, but I think if the October report comes in around the 190,000 estimate, investors will see that as a positive. However, if the number comes in way higher or the unemployment rate fails to increase, it could be another sign that the labor market is still strong and inflation is still persistent. That would likely send stocks lower.
2. Midterm elections
There's no denying that politics can impact the stock market, and the midterms are one of those political events that investors will be watching. Voters will head to the polls on Nov. 8 to cast their ballots for various open seats in the U.S. House of Representatives and the U.S. Senate.
Why do the midterms matter? Lawmakers can pass bills raising or dropping corporate taxes and implement lots of other policies that impact the financials of publicly traded companies. Congress can also pass bills that further regulate or make it harder to do business in a specific industry.
That's why investors have historically preferred a divided Congress because it makes it very difficult for either party to enact major legislation that could adversely impact the stock market. It also creates less geopolitical uncertainty.
Right now, many polls suggest that the Republicans have a good chance at taking control of the House, while the Democrats are hoping to retain the Senate, although it's close. As we've seen before in elections, anything is possible, so there certainly is a path to a divided Congress that investors might perceive as bullish for the next two years.
3. New inflation data
With inflation at a 40-year high, new data from the Consumer Price Index (CPI), which tracks the prices on a market basket of consumer goods and services, has become one of the highlight events for investors to focus on this year.
The Fed has been raising interest rates to slow the growth of inflation, so the longer inflation remains high, the longer the Fed will have to raise rates, which have really hammered the market this year.
However, inflation reports are becoming more difficult to interpret. September inflation data showed that the CPI ticked up 0.4% from August. Core inflation, which strips out food and gas prices, also moved higher. Inflation did not seem to be slowing, yet stocks enjoyed a banner month in October. Investors are seemingly more upbeat that inflation will soon start to slow.
While investors have begun to turn their attention to a potential recession in 2023, I still think that data showing clear signs of slowing inflation could boost stocks because it would likely allow the Fed to take its foot off the gas. The U.S. Bureau of Labor Statistics will release October CPI data on Nov. 10.
