September 23, 2022
Good morning,
The notion that the market might have been properly discounting the Feds action and comments coming out of their FOMC meeting Wednesday afternoon was plainly wrong. The Fed did raise rates by +75 bps as expected, but it was the commentary after the rate hike that was the surprise, which began another round of discounting. In the Q&A with Chair Powell, the question and answer that surprised the most: “How will you know if you’ve overtightened – gone too far?” Answer: “We won’t, there is no way of knowing that in real time”. The S&P 500 Index has fallen approximately -3.7% since Wednesday’s Q&A.
The FOMC raised the fed funds target range by 75 bp to 3.00% to 3.25%, from a range of 2.25% to 2.50%, the highest since Q1 2008. It was the third straight 75 bp increase for a total of 300 bp so far this cycle. That made it the fastest increase in the policy rate since December 1980. And more hikes are coming. Expectations of future Fed rate hikes (known as the dot plot) was also slightly more hawkish than markets expected. It revealed that FOMC participants were nearly evenly split between ending the target range for this year at 4.00% to 4.25% and 4.25% to 4.50%, with one more favoring the latter. The median expected another 25 bp of tightening in 2023, for a terminal range of 4.50% to 4.75%. There is a wide range of rate cuts expected in 2024 and 2025.
The S&P 500 Index is now only -3.22% away from its June low – the market is in testing mode. It is deeply oversold once again, and the calendar is getting closer to the end of the seasonally worst period for stocks. There is a bit more certainty in the market now but unfortunately it is rising certainty of a recession. While that doesn’t appear to be heartwarming, it is worth recalling that markets behave similarly in terms of net declines ahead of recessions. Where they differ is dependent of the speed in which the Fed raises rates. The steeper the slope of rising rates, the earlier the damage is done to stocks in the cycle. As mentioned above, this is the fastest rate hike in over 40yrs. I’m suggesting that much of the damage may already have occurred.
Have a nice weekend and be well,
Mike