“It is very premature to be thinking about pausing interest rate hikes. When people hear lags, they think about pauses. It’s very premature in my view, to talk about pausing our rate hikes. We have a way to go.” So said Fed Chairman Jerome Powell this past week when a ¾% rate hike was announced. He also went on to say that inflation has become “more and more challenging” over the previous six weeks. This is the fourth consecutive time the Federal Reserve has implemented a ¾ rate hike. The Fed rate now stands between 3.75% and 4%.
The Federal Open Market Committee will meet again in December to implement another rate hike. This is guessed to be “only” ½% however that may be adjusted after the CPI (Consumer Price Index) is reported on Thursday (11/10/22). If a number of 8% or higher is given, look for another ¾% rate hike.
For the week 10/31/22 – 11/4/22 the S&P 500 was down 3.3% as were most of the major indexes.
Mortgage rates continue to rise with a national level of a 30-year fixed rate standing north of 7%. A year ago they stood at approximately 2.6% and just six months ago stood at 3%!Demand for mortgages has experienced its steepest decline in 25 years. Some housing industry experts continue to forecast a drop in housing prices as well. A decline of 10 – 15% seems to be the consensus.
It appears that many Americans believe that the economy is bad and will only get worse. This according to a recent Gallup poll where 2/3 of those polled were of that opinion. Certainly not good news for incumbents this upcoming election day on Tuesday. Unfortunately, these attitudes and numbers can easily become a self-fulfilling prophesy.
The current Inflation rate stands at 8.2%
The recent upswings in the equity markets have caused many investors (not the ‘average’ American above) to believe the worst is over. After all, how much worse can the S&P 500 get? Year to date it is a negative 13.8% - the worst year-to-date (so far) performance since World War 2!
Another indicator, which for us is a very large concern, is what’s known as ‘the Inverted Yield Curve’. This happens when short-term interest rates yield a better interest rate than longer-term interest rates. An inverted Yield Curve is usually an indicator of an impending recession. The ‘street’ believes that economic growth will slow considerably when this phenomenon appears. The Yield Curve has been in an inverted position since this past July. If someone were to analyze the underlying causes of the downturn of 2008, they would note that what kept the economy going for a few years prior was the real estate market. When it hit the fan in 2008, things not only went bad, but they also went horrible. Today the strongest part of the economy is found in the labor market due to low unemployment and the opening of many unfilled jobs.
Although we are not yet in a recession, there are indicators–the Inverted Yield Curve is but one - that are signaling that one will happen.
As we’ve stated through the last months, we believe a Panic Bottom will be the signal to reenter the market. Panic Bottoms happen when people just can’t take the losses any longer, grab their parachutes and jump out the door. This could happen over the next few months although if anything unexpected occurs (You really don’t need any imagination here) it could occur within weeks. We see a bottom to the S&P 500, a much better measure of the stock market, of somewhere around the 3,300-point mark.
We do not see anything currently to convince us that we are enduring anything more than intermittent ‘Bear-Market Rallies’ therefore the opinion here is to stay in cash (money market). When the markets begin to turn around, you will be sitting with much more investment dollars available to work for you. Remember – it’s not what you make, it’s what you keep that counts.