Halloween is on Tuesday. Investors have been spooked since early August. They are still spooked by the widening federal deficit, partisan gridlock in Washington, sticky inflation, Fed hawkishness, and a world of trouble. They've been reacting to good economic news as though it is bad news since inflation is less likely to moderate if the economy is strong. We don't agree because we think that productivity is boosting real GDP growth. It did so during Q2, and probably did it again in Q3's Productivity & Costs report, which will be released by the Bureau of Labor Statistics on Thursday (chart).
The S&P 500 is down 10.3% from its July 31 peak so far this year. It's not likely to regain what has been lost since then over the rest of this year as we expected in August and September. We still think that a Santa Claus rally is possible. But between now and Thanksgiving, it's easier to see downside than upside for the stock market given the unsettling developments in the Middle East and jitteriness in the bond market.
The risk-off sentiment is evident in the Russell 2000. Its bear market, which started November 8, 2021, consolidated over the past 12 months, and now may be resuming (chart).
