The markets have been on a wild ride this past quarter. Rising interest rates and softer equities were the major themes in the third quarter as markets continued to digest an aggressive Federal Reserve and post-COVID resets in consumer behavior. Uncertainty makes for nervous investors, which has been reflected in the markets.
Market activity can often be compared to a pendulum, quickly swinging from one extreme to another. That’s exactly what we’ve seen of late. The S&P 500 declined by 9.34% for the month of September, then gained back over 5% in the first two trading days of October. This marks the largest two-day gain in two years. This is a reminder of how unpredictable markets can be and the importance of sticking to your long-term investment plan.
Inflationary Pressures
Elevated inflation will persist over the near future. The higher CPI (Consumer Price Index) keeps the Federal Reserve’s door open for further hikes. It seems that the benchmark overnight Fed Funds rate increasing from 0.25% to 3.25% has not had the desired impact on inflation yet. Further hikes are expected. It’s important to be patient as it takes time for central planning moves to reverberate throughout the economy and reflect in consumer pricing.
Some areas of the economy are beginning to see lower prices. Crude oil prices have continued their recent downward trend, trading below $80 since December 2021. July and August data show housing prices softening due to the sharp rise in mortgage rates and economic uncertainty, specifically in overheated areas like Seattle and Las Vegas. Fertilizer prices have come down from their highs, affecting food supply chains. The backlog of containers at major shipping ports has largely been cleared, and shipping costs have declined. All of these factors fueling inflation have either eased or disappeared entirely in the past few months. Consumer prices have yet to fully reflect this changing environment.
Fed Overtightening?
The Fed raised rates by 0.75% in the September meeting, bringing the current target rate to 3.00–3.25%. As we have witnessed this rapid rise in rates, some have speculated that the Fed is overtightening. It seems that the Fed may be opting for a hard landing: getting the rate hikes done swiftly and aggressively in hopes that the resulting fallout is short-lived. In contrast, a soft-landing approach would most likely have been to raise slowly and without tipping the U.S. into recession. Many indicators show that the United States is already in a recession (and has been for some time), depending on the definition used.
It remains to be seen how aggressively the Fed will approach interest rate increases for the remainder of 2022. Significant hikes will be a drag on market activity, while more measured increases are likely to spur market growth.
The Takeaway
Third-quarter earnings season will be in mid-October. Analysts expect earnings to come in lower than previously forecast for many companies. This means companies are still expected to make money, just a bit less than had been projected. The bottom line is that the economy is not cratering, but we are seeing challenging conditions for affected sectors. The expected culprits are lingering supply chain issues for some sectors, inflation, and the stronger dollar. As an example, recent earnings from FedEx and Nike are indicative of a possible recessionary environment.
While the environment is challenging, this current cycle had to play out sooner or later, as monetary policy is variable. Easy monetary policy can’t remain easy forever, and tight monetary policy won’t remain tight forever.
Long-term investors will experience multiple cycles of expansion and contraction over a lifetime. Dollar cost averaging is a tried-and-true savings approach in a down market cycle. Rising rates means an increase in yields for money market, CDs, and bonds, making these assets more attractive. Please feel free to reach out if you are interested in discussing your investment plan or you’d like to explore money market or CD rates. Remember to think long-term and know that an ever-changing market is the only certainty.
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.