Lineweaver Financial Markets Update
Following the conclusion of its September meeting, The Federal Reserve (Fed) announced another “jumbo” interest rate hike of 0.75% and communicated that further interest rate increases will likely be appropriate in the coming months. The Federal Open Market Committee now projects its target interest rate to be raised an additional 1.00% to 1.25% by the end of 2022. Following this announcement stock markets declined, resulting in the S&P 500 index re-entering bear market territory (more than 20% below its January high).
In August’s inflation report, the Consumer Price Index rose 8.3% from a year ago, suggesting that inflation may prove higher and longer lasting than many previously believed. In response, Federal Reserve chairman Jay Powell reiterated that the Fed intends to continue raising interest rates, rather than prematurely pausing or pivoting as financial markets had hoped over the summer. From June lows to August highs, the S&P 500 index rallied nearly 19%. As you may recall, we took advantage of that run-up in equity markets to rebalance investment portfolios back in line with the asset allocation most appropriate to meet long-term investment objectives (for reference, asset allocation is the percent of a portfolio’s investments held in each major asset category, such as stocks, bonds, or other securities). We did this to manage risk as we entered what we felt may be a volatile fall.
Thus far, stock declines have occurred while corporate profit estimates have remained relatively stable. This has led to the price-to-earnings ratio (the price of a stock or index, divided by earnings per share of the stock or index) of the market to decline from elevated levels to near its historical average. In our view, any further declines in the stock market from here would likely be driven by declining corporate profit estimates.
As the Fed continues to raise interest rates to levels it considers “restrictive” (designed to intentionally slow the economy), there are likely to be downside economic consequences, though to what degree remains uncertain. A slowdown in demand for goods and services and broad economic activity is required to bring down prices sufficiently to get inflation under control.
Current market anxieties - including rising interest rates and previously noted persistent inflation - have pushed the S&P 500 Index into its 12th bear market in the past century. The current bear market is already nine months old, compared to the average bear market lasting between 14 and 15 months.
In time, current market anxieties will pass, as have past bear market worries, including a pandemic, global banking crisis, technology bubble bursting, savings and loan crisis, previous periods of inflation, and oil embargos. So, while we are managing risk in the near term, as we anticipate volatility to remain elevated, we are also positioning to take advantage of opportunities in the coming quarters, which previous bear markets have presented.
As the markets continue to adjust to changing conditions, we will closely monitor the situation and make changes based on your financial needs, goals, and risk tolerance as necessary. If you have any questions in the meantime, please contact your advisor.
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