September 2022 Market Commentary
Written by Gary Quinzel, CFA, CFP
Executive Summary
The Fed’s hawkish tone and higher interest rates are driving the most recent market downturn. While near-term risks are plentiful, patient investors with long time horizons can benefit from today’s volatility.?
What Piqued Our Interest
The market has been quite choppy since the Jackson Hole Symposium concluded in late-August. Federal Reserve Chief Jerome Powell reinforced his resolve on fighting inflation with a hawkish tone that somewhat contradicted the more dovish sentiment from the most recent Federal Open Markets Committee (FOMC) minutes. After Powell cautioned against reintroducing accommodative policy prematurely, interest rates increased across the curve, with the yield on the 2-year Treasury reaching 3.46%, over a half-percent higher than one month ago.?
Given the Fed’s “higher for longer” messaging, the path of least resistance for risky assets has been lower following the mid-summer bounce, as there has been no shortage of additional bearish talking points. Amongst them, earnings risk from pressured margins, China’s adherence to their no-Covid policy, and surging energy prices in Europe all pose significant threats. Additionally, seasonality is a factor, as September is historically the worst month of the year for equities, averaging -1% going all the way back to 1928, according to Yardeni Research.
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Source: FactSet, as of 9/2/22
Peak inflation remains a hot topic, and while it’s too soon to determine if we reached a top, our base case is that inflation continues to subside but remains above the Fed’s target for an extended period. On the positive side, gasoline prices declined for 12 straight weeks as of the end of September and are down approximately 25% from the mid-June peak. This has helped headline CPI fall from a high of 9% in June to 8.5% in July. However, not all prices are on the decline: One example is the shelter component of CPI, given that rental vacancies and home affordability are low.
Another notable factor supporting higher prices is the strength of the labor market, which remains historically tight. The U.S. added 315,000 non-farm payrolls in August, surpassing estimates, while average hourly earnings rose 5.2% annualized—off its high but still well above its long-term average. Lastly, while higher interest rates might stem inflation on the demand side, it may also impede...