All data and commentary as of September 28, 2022.
With only a few months left before we bring 2022 to a close, the question that is front of mind for many investors is the same as it was toward the beginning of the year – Are we headed for (or already in) a recession?
While there has been no shortage of developments in financial markets, macroeconomic headwinds are largely unchanged. The Fed is still in focus as they raise rates to fight stubbornly persistent inflation, market volatility has remained elevated, and geopolitical/macroeconomic issues have continued to provide uncertainty to the markets.
The Fed has remained at center stage amid an unprecedented series of rate hikes to tame inflation.
- After their most recent September meeting, the fed funds rate reached a target of 3.00% to 3.25% after 3 consecutive supersized hikes of 0.75%.
- Raising interest rates encourage consumers to save, cut spending, and reduce credit use – all of which help to cool off the economy and bring down inflation.
However, markets seem unsure if the Fed will be able to execute on their plan successfully without significant consequences to markets and investors. Acting too aggressively and raising rates too quickly would likely shock the markets and create downward pressure for equities, and failing to raise rates quickly enough could allow inflation to spiral out of control which would also lead to pain for consumers as prices continue to rise.
Forward guidance that accompanied the September FOMC meeting implied continued rate hikes with an expected terminal rate of 4.6% in 2023 and a restrictive rate regime in place until at least 2025. The committee acknowledged that inflation has been stickier than expected and indicated that their long run target of 2% may not be reached for another 2-3 years. Fed Chair Jerome Powell indicated that there will likely be a period of “sustained below-trend growth” in his statements but avoided using the word recession.
Equity markets have struggled all year to gain positive momentum with this gloomy economic backdrop and sunk back below 20% from their pre-2022 levels in reaction to the Fed’s comments, erasing gains from a brief summer rally. Most analysts predict continued volatility into 2023 and increasing risk of a recession in the next 12 months, but even the most bearish of markets can provide opportunities to investors with patience and a long-term outlook.
We continue to actively monitor markets, and your portfolios, and are taking the opportunity to harvest losses where appropriate to lower tax liability and provide more trading flexibility where appropriate. We are also maintaining a shorter duration within the fixed income sleeve of portfolios, which historically provides downside mitigation benefits in a rising interest rate environment.
Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.
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