09/25/2023 Market Strategy
Great Expectations Meet Curb Your Expectations
Stocks tumbled further last week after the Fed signaled that tight policy may persist
Key Takeaways
- Last week’s “pause” by the Fed was not a great surprise to us, but some were concerned about just how many more hikes are still to come and how high rates may have to go before the Fed determines that its inflation target is within reach.
- Both the bond and stock markets reacted to the Fed’s decision by taking prices lower, sending the 10-year Treasury yield to its highest level in 16 years at Thursday’s close.
- In our view the efforts of the Federal Reserve since March, 2022 when they started raising rates have shown a high level of sensitivity to the effects of monetary policy on real activity.
- Data this week will bring regional Fed reports on manufacturing and services activity, which could shed light on the degree of resilience in the economy.
Somehow we have to think the stock market over-reacted last week while the bond market acknowledged what the Fed said it would do: skip a rate hike for now -- but remain vigilant as to the stickiness inflation has exhibited of late even as the Fed has remained on the job and committed to achieving its target inflation rate of 2%.
The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite last week respectively shed 1.89%, 2.93% and 3.62%. Certainly not what we’d call a “market rout” across the major large cap US stock indices but certainly enough to capture attention and encourage us all to take another “glance under the hood” or more contemporaneously “check the diagnostics.”
We consider keeping things in context when bears, skeptics, and the nervousness of some investors and breathless market observers seem to crowd the media landscape as occurred last week.
Indeed September has not been good in a number of ways. Bond buyers have found that bonds with attractive yields when they bought them just a few weeks or months ago have slipped in price somewhat as yields have risen, stock buyers have seen stock prices and widely followed stock market benchmarks give back some gains from this year’s rally and the broader rally that began from last October 12.
Worth Noting
The Dow Industrials, the S&P 500 and the NASDAQ Composite (some 40% weighted in tech and tech stocks) from the start of the year through last Friday’s close showed respective price gains (before dividends are added in) respectively of 2.46%, 12.52% and 26.23%.
These same indices respectively showed gains from the broad market lows of last year on October 12, 2022 through the close last Friday of 16.27%, 20.77% and 26.83% not including dividends.
From the broad market high on July 31 of this year the same indices have dropped 4.49%, 5.86% and 7.91% not including dividends which would have positively offset losses if total return was considered in the calculation.
When we consider the Fed’s FOMC meeting outcome producing a second “skip” in the rate hike cycle last week on back of what has been eleven hikes and a previous “skip” (or pause in the hiking process that began in March of 2022) we see it as about right for now and about par for a rate hike cycle that is addressing overstimulation of the economy during and in the process of exiting a pandemic health crisis that shuttered industries and disrupted the US economy as well as economies around the world.
Two crises in close succession led to a 14-year period in which interest rates managed by central bankers reached historically low levels. As a result of the pandemic and the resultant stimulation by the Fed and politicians (fiscal stimulus from two administrations) a period of “free money” was reached that ignited inflation and speculation that if left unchecked could have challenged the stability of the world order.
In our view we see today’s Fed as being on the case in a manner that has been a hallmark of the Fed since Ben Bernanke’s tenure as Fed Chair -- and thus far through the terms of both Janet Yellen and
Jerome Powell -- wherein the Fed has practiced a high level of sensitivity and communication in managing the effects of practicing its mandate on the economy and the state of employment in the United States
Have you ever been experienced?
As a seasoned colleague, friend and guru in our business reminds us often, “It’s never easy”. That’s certainly true for those of us who have lived and labored through the booms, busts and recoveries in the markets and economies around the globe over the last forty years.
The pandemic crisis and its aftermath that have included: shutdowns, military incursions, domestic and geopolitical turmoil, diversification from a one country global supply chain to a broader supply chain, alternative energy and multiplicities of innovation as well as a host of other developments.
In our view despite how troublesome as the last 15 years have been for investors, we’d also pause to note what great opportunities, innovations and remedies they have wrought.
Beware of Darkness
As much as things change some things never change. At this juncture we’d suggest avoiding reading too much negativity into the haircut the markets have received of late, consider the opportunities it presents to seek out “babies that get thrown out with the bath water” (great companies whose stocks are sold off in market downdrafts) and a broader diversification that considers the opportunities fixed income investments can offer as a highly complementary asset class to prudent diversification in an environment in which once again bond issuers pay for the privilege of borrowing money and bond buyers receive something of worth in the coupons bonds offered today.
With Q3 earnings season to get unofficially underway some three weeks from now (October 14) when the big US banks report revenue and earnings results--- economic data, comments from Fed officials along with business and political (both domestic and geopolitical) news will carry considerable weight on a day to day basis as to the direction the markets take.
Our Goal is beyond
We’ll stay the course for now considering the opportunities that are here today as well on the horizon. These are likely to benefit consumers and business across the sectors from Wall Street to Main Street and across the globe.
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