Bear Market Continues – Monday Morning Market Memo – September 26, 2022

Bear Market Continues – Monday Morning Market Memo – September 26, 2022

U.S. equities remain in a Bear Market (a drop of 20% or more from recent highs), with the negative trading action continuing last week, as all three major stock market averages posted another week of steep losses. The Dow Jones Industrial Average lost 4% to 29,590 – the NASDAQ Composite tumbled 5.1% to 10,868 – and the Standard & Poor’s 500 Index shed 4.7% to 3,693. These indices have now lost ground in five out of the last six trading weeks.

Stock prices slid following another (relatively) large ¾ percentage point rate hike by the Federal Reserve last week. While that move was widely expected by the financial markets, the commentary by the Fed was more hawkish(tight monetary policy) than the market anticipated. A lively debate is ongoing as to whether the U.S. is currently in a recession or not, but either way, investors are worried the higher interest rates and more aggressive Fed will slow the economy too much going forward.

Estimates are the Fed will raise rates another ¾ percentage point in November, and ½ point in December, bringing the Fed Funds rate to a range of 4.25 to 4.50 by the end of the year. The CME FedWatch Tool puts the probability of such rate hikes at 76.2% and 69.2% respectively. Away from rising rates slowing the economy, they also weigh on equity prices by taking away/weakening the TINA narrative. TINA is the oft quoted Wall Street acronym – There Is No Alternative (to stocks).

With bond yields having been so low for so long, and cash earning near zero, many investors looking for returns felt they had nowhere else go and were “forced” into equities. With 2-year Treasuries now yielding over 4% (compared to less than 1% not too long ago) for example, investors do have an alternative to stocks. So rising rates are currently pressuring stock prices in multiple ways.

Bullish (positive on market) investors counter the prowling bear and current negative market sentiment with various arguments/points, including – that interest rates are only returning to more normal levels, stocks outperform bonds historically, and they are now trading at more attractive valuations. Additionally, many hold to the belief the Fed (despite its more aggressive signaling), will have to reverse course and begin cutting rates at some point in 2023. Before that comes into play however, markets will have plenty new to digest – more inflation and employment reports, another upcoming earnings season, the midterm elections, and developments on the geopolitical scene, to name just a few. So, the Bulls and Bears will have more than usual to wrestle with. Regarding the current market volatility, we continue to believe in time in the market, rather than timing the market!

Looking more to the immediate future – meaning this week – we’ll get a handful each of earnings reports and economic releases. Earnings reports out this week include Micron Technology, Nike, and Paychex. Economic reports to watch include August’s Durable Goods Orders and New Home Sales due out tomorrow, along with Personal Income and Personal Expenditures data for August, scheduled to be reported by the Bureau of Economic Analysis on Friday.

As always, don’t hesitate to reach out to us with any questions, to discuss things during these volatile times, or to set up a meeting.

All the best – Southport Station Financial Management, LLC