October 4, 2022
Market Monitor: September Update
Headlines and Highlights
- September sell-off cements markets’ worst nine-month start in 20 years: U.S. and global stocks sank sharply last month, pressured by central banks’ intensive policy-tightening to reduce inflation. The Standard & Poor’s 500 index had its worst month (-9.2%) since March 2020, sealing its biggest decline in the first nine months of a calendar year (-23.9%) since 2002. Bond prices also fell as yields rose to match interest-rate expectations; the 10-year Treasury yield briefly topped 4% for the first time in 12 years.
- Fed pushes interest rate to 3%, eyes 4%: The Federal Reserve lifted the target for the benchmark federal funds rate – anchored at zero as recently as March – to a range of 3% to 3.25% as it focuses on stamping out high inflation. Fed officials forecast that rates could reach 4.4% by the end of this year and 4.6% in 2023, steepening their prior estimates. Vice Chair Lael Brainard said the central bank is monitoring financial-market turbulence but remains focused on its inflation fight until its goals are achieved.
- Consumer confidence highest since April: U.S. consumers continued to show surprising resilience last month in the face of this year’s inflation and other challenges, buoyed by lower gas prices and a strong job market. The Conference Board’s index of consumer confidence rose to its highest level in five months with a second consecutive increase. A separate measure reflecting consumers’ six-month outlook was the highest since February.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- The Federal Reserve looks set to raise the federal funds rate by another three-quarters of a percentage point at its next meeting in early November. We see little chance of the Fed pausing its rate increases by year-end, based on recent comments of Chair Jerome Powell and other Fed officials recommitting to their tightening trajectory. The rate hikes should ease in the first half of 2023.
- We expect to see a bigger deceleration in inflation in upcoming months as the Fed’s rapid-fire series of rate hikes hits consumers and businesses harder. The latest Commerce Department data shows spending on durable goods falling and ocean freight orders are down, signaling a drop in consumer demand.
- Real estate investment trusts have fallen disproportionately in the latest sell-off as the Fed signaled no let-up in its interest-rate increases, but we retain our conviction in this investment class. More turbulence could lie ahead before a recovery; however, valuations already are historically low and REITs have generated high returns in the year following past rate hikes.
- Chances of a U.S. recession have risen as the Fed keeps tightening, reducing the likelihood of a soft landing for the economy, although we still do not expect a deep or protracted slump. The Atlanta Fed estimates that the economy grew by 2.3% in the third quarter and analysts surveyed by FactSet still forecast positive corporate earnings in the third (2.9%) and fourth (4.0%) quarters. Earnings estimates have come down significantly, however, and we will be monitoring reports closely this month for changes in companies’ outlooks.
- The U.S. dollar’s latest surge against other currencies, tied closely to the Fed’s interest-rate hikes, has increased pressure on the global economy. However, the world economy is still on track for modest growth both this year and next. The 17% rise in the dollar index this year is unsustainable.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice