Market Note – September 27, 2022

By Hightower Great Lakes on September 27, 2022

Interpreting the Fed and Subsequent Selloff

Markets found no positives from the Fed’s hawkish commentary, which continued to emphasize a higher for longer policy and “diminishing” chances for a soft landing.

Chair Powell said, “inflation has not really come down” and believes the latest 75 bps hike just begins to enter restrictive territory. There was no indication of an impending pause or pivot.

The Fed’s dot plot indicates a peak 4.6% fed funds target in 2023, which is roughly 150 bps higher than the current 3.0-3.25% range. It also indicates a year-end 2022 target 4.4% rate, implying another 125 bps across the final two FOMC sessions of the year.

Chart 1: Latest Fed Dot Plot Indicates Rates Near or Above 4% Through 2024

Monetary policy has a lagged economic impact, though its effects are starting to be realized more broadly.

The Atlanta Fed lowered their Q3 GDP forecast to just +0.3% m/m, compared to its +2% estimate last month. The labor market remains tight, and Chair Powell said, “there’s only modest evidence that the labor market is cooling off.”

However, we are starting to see signs of unemployment rising further, with leading indicators like rising initial claims. And importantly, inflation is projected to remain stubbornly high – not reaching the Fed’s 2% target until 2025.

Take the Fed’s goals and targets with a dash of salt, given how much can change over the course of time.

Shelter and wage costs continue to drive persistent inflation. Chair Powell indicated that, “shelter inflation is going to remain high for some time.

We’re looking for it to come down, but it’s not exactly clear when that will happen.” Shelter costs, particularly rent, is a key contributor to inflation.

Similarly, real wages have risen the past two consecutive months, pushing higher costs broadly, particularly in services, even as commodity prices fall.

Global Central Tightening Policy

It’s not just the U.S. central bank raising rates; 17 central bankers raised rates last week, and another dozen central banks meet this week.

This is a global shift from monetary easing to monetary tightening, resulting in markets pricing in slower growth and higher geopolitical risk.

Looking Past the Here and Now

We are seeing capitulation across valuations and following the sentiment indicators closely. The market is a forward-looking indicator, and the S&P 500 is already down 22% year-to-date; it’s sniffing out the downturn.

Goldman Sachs shared that their “outlook is murky,” while cutting its S&P 500 price target by 16%.

Bank of America also lowered its economic outlook, as the Bank of America Bull and Bear indicator fell to zero, with its analysts saying that sentiment is “unquestionably” the worst since the great financial crisis as investors flock to cash.

The latest AAII sentiment survey has a bull-bear spread -43.1%, worse than the lows during the dot-com bubble and not far off the lows of the great financial crisis. And the CNN Fear & Greed indicator has moved back into “extreme fear” territory.

Q3 earnings growth was projected +10.7% y/y at the beginning of the quarter; projection for Q3 growth is now +3.2%.

64 companies in the S&P 500 have issued negative guidance, compared to 41 issuing positive guidance.

JPMorgan indicated that revisions may be bottoming, while equity allocations and positioning remain very low and could help limit further downside – household equity allocations reverted to 2018 levels, more than reversing post-pandemic increases.

For a baseball reference, all of this combines to illustrate a 9th inning scenario.

While stocks follow profits, they have significantly discounted to account for the “diminishing” chances for a soft landing and a period of slower growth.

We don’t know where earnings are going and anyone who tells you they know, they’re guessing. We’re looking to buy low and sell high.

An Eye Toward Global Currency Markets

The dollar reached its highest level in decades against a variety of global currencies, propelled by higher U.S. interest rates and slowing global economic growth.

On Friday, the U.S. dollar reached its highest level against the Euro in 20 years, and its highest level against the pound since 1985.

The seriousness of 1985 required global intervention to weaken the dollar, known as the Plaza Accord, and many agree this multilateral coordination is unlikely in today’s environment.

A growing list of countries are intervening in foreign exchange markets, trying to slow the depreciation of their local currency.

Bonds Fall as Rates Rise

Treasury yields surged last week after the FOMC hiked interest rates by 75 bps for the third consecutive time, driving the 2-year yield to 4.20% for the first time since 2007.

While tighter than their peak in early July, both Investment Grade and High Yield spreads spiked wider last week. Investment Grade finished the week at +175 bps and High Yield at +506 bps.

The municipal yield curve flattened significantly last week, as the short-end rose 35-39 bps while the long-end rose 16-25 bps.

The Week Ahead

Earnings – Wednesday: MTN. Thursday: MU, NKE

Economics – Monday: Dallas Fed Index (September). Tuesday: S&P/Case-Shiller Home Prices (July), Consumer Confidence (September), Richmond Fed Index (September), New Home Sales and Building Permits (August).

Wednesday: Wholesale Inventories (August). Thursday: Final Q2 GDP. Friday: Core PCE (August), Chicago PMI (September).

Return for Selected Indices¹

Click here to read last week’s Market Note (9/19).

SOURCES

¹ Source: Bloomberg

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.