Market Update – September 23, 2022

The strong reaction to the Federal Reserve’s comments following the most recent meeting on Wednesday has led all equity and fixed income markets down in a dramatic way. The S&P 500 is down approximately 5% from the Tuesday market close and yields on the 2- and 10-year Treasuries have increased almost 0.20% (20 basis points). What has driven this reaction?

As discussed in previous communications, the Fed was behind the curve on taking appropriate actions to mitigate inflation beginning last year. The realization and fear associated with delayed diligence have led to continued aggressive Fed action. In June, the Fed’s estimate for short-term rates at year-end was 3.4% and as of the most recent meeting, it is now targeting 4.4% and an ultimate end target rate of 4.6% in 2023.
The higher-end target rate has raised recessionary concerns in the market. We may already be in a recession, but the market believes that this tightening cycle may be too aggressive, and the probability of a soft landing has declined dramatically.
Corporate earnings expectations will likely be lowered and overall valuations realigned through declines in equity prices. In addition, the strong dollar will continue to have a negative impact on companies with international business.
Fear is driving the market and Friday’s market action is a true liquidation event.

In late July, our strategy shifted slightly to increase our cash position, lower our bond exposure, and become more defensive (dividend-focused) in our equity positions. We retested the June lows today, however, keep in mind the stock market had rebounded by approximately 17% from those lows through early August. We have been in a bear market since early this year and bear markets are a process. Most bear markets last on average 9 to 18 months and work through the process of finding a bottom. The average bear market in a recession declines 30% and currently, we are down approximately 25% from the highs.

It is never easy to experience negative markets and know that we continue to review, monitor, and adjust our market strategy if needed. Remember nobody can predict an exact bottom in the market. There may in fact be more downside. However, we believe there is significant opportunity on a long-term basis for investors who stay the course.

We will go into more depth on the markets and our outlook in our upcoming quarterly piece. We are available for consultation to serve our clients and we encourage updating financial plans while maintaining a balanced perspective overall. We appreciate your trust and confidence in Midland Wealth Management. If you have any additional questions or concerns, please do not hesitate to reach out to your relationship manager.