What happened
Shares of all major market indexes are rising this week, largely thanks to better-than-expected inflation data and after experiencing some volatility earlier this week.
The S&P 500, a benchmark for the broader market, had risen close to 5% for the week as of market close Thursday, according to data provided by S&P Global Market Intelligence. The Nasdaq Composite, a good proxy for the tech sector, climbed more than 6% this week, and the Dow Jones Industrial Average ended Thursday up 4%.
So what
The market got off to an interesting start this week, with most investors thinking about the midterm elections. Although the country has been quite divided politically, I think most investors saw this event as a potential catalyst because Congress was expected to be divided, which has historically been good for markets.
Image source: Getty Images.
As of this writing, votes are still being counted, but it looks like there will be either a split Congress or the Republicans will control Congress. However, with President Joe Biden a Democrat and Democrats still having a strong number of seats in each chamber, Congress and the government might as well be divided, so overall, it's still a pretty good situation for investors. Additionally, markets tend to perform well following the midterm elections, regardless of the results.
However, the week took an interesting turn when one of the world's largest crypto exchanges, FTX, suddenly ran into a liquidity crunch after rumors about the firm's balance sheet and potential solvency issues. To deal with customer withdrawals, Binance, another large crypto exchange, said it would buy the firm pending due diligence. But a day later, Binance walked away from the deal, suggesting that buying FTX would likely not be worth the trouble it would cause.
Once Binance pulled out of the deal, the crypto market fell hard. I think some of this pain also leaked into the broader financial markets, with stocks and cryptocurrencies trading more similarly this year than they have in the past.
Luckily, new October inflation data saved the week on Thursday. The Consumer Price Index (CPI), which tracks the prices on a market basket of consumer goods and services, only rose 0.4% from September and finished October up 7.7% year over year; both numbers came in below projections. Notably, the CPI saw prices ease on food, used vehicles, transportation, and medical services.
The October CPI report shows the best evidence yet that inflation is slowing. This will likely allow the Federal Reserve to take its foot off the gas and at least slow the pace of interest rate hikes at its December meeting, potentially only doing a half-point hike. The Fed is coming off of four consecutive 0.75 percentage point hikes. The CPI news on Thursday sent stocks soaring and resulted in the best day for the S&P 500 and Nasdaq in two years.
Now what
Considering that I subscribe to the concept of long-term investing, I firmly believe that all three of these broader market indexes will go up in the long run.
In the near term, the slowing pace of interest rate hikes should continue to buoy stocks, although the market could again be challenged if there are indicators of a deep recession in 2023.
But again, history tells us that these broader market indexes tend to perform well over the long haul, so I think history is bound to repeat itself in the future.
