2022 September

The battle against inflation rages on.  The cost of goods and services continues to skyrocket, with occasional pockets of relief that may signal a move in the right direction. While the news is bad here in the US, parts of the world are facing a colder, darker, bleaker winter with no way to afford to keep the lights on at home and at work.

The Federal Reserve again raised interest rates, in hopes of turning back the tide of inflation. September saw another 75 basis point (0.75%) rate hike. Beyond this week, we expect smaller, but continued rate hikes, of about 100 basis points total before the Fed is done by early next year.  That means getting to around 4.0% on short-term rates.  

After that, we don’t expect the Fed to cut rates unless one of two things happens: the economy is heading into recession or high confidence inflation is heading down toward the 2.0% target.

The first possibility is that the Federal Reserve eventually gets monetary policy tight enough to bring inflation down toward its 2.0% target, which can induce a recession, probably not this year, more likely in late 2023 or 2024. In that scenario, a new bull market would start sometime during the recession, once investors start to grow more confident about the potential recession ending soon.

The second possibility is that the Fed pulls off a soft-landing, in which case a bull market would start once investors become more confident the Fed has pulled it off. We’d love to see this second scenario play out, but we like to plan for the worst and hope for the best.

We don’t expect the S&P 500 to hit a new all-time high, above the old high of 4,797, until one of the two scenarios plays out.  US equities are likely to be in a trading range with potential bear market rallies that come and go. At current prices, equities could easily rally from here, but if a recession is eventually coming that rally will not last.

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Reminder of why this is happening and common causes of inflation.

Supply chain

War in Ukraine and supply chain disruptions worldwide during the pandemic caused shortages of everything from toilet paper to semiconductor chips.

Housing Market Catapults

The housing market is a major part of the U.S. economy. When the world was on lockdown, we all took a hard look at where we worked, lived, went to school, and recreated. When these became one and the same place, people wanted to upgrade. Remodeling, or moving were on the top of many people’s priority lists.

There Is More Currency Available

In response to the Covid-19 pandemic and subsequent lockdowns, the Fed released the equivalent of $3.8 trillion in new liquidity in 2020. That amount was equal to roughly 20% of the dollars previously in circulation. And it is one reason why many investors were watching the Consumer Price Index (CPI) closely in 2021.  We are watching for new CPI data will be released mid-October.