Fall 2022 Market Update

The arrival of Fall on the calendar often causes a bit of nervousness for most of us in the money management business. September and October never seem to fail in providing their share of excitement. There is almost always some sort of sell-off accompanied by what is perceived as a good reason for it. As of this writing (9/14/2022), we are about 24 hours past a 4% one-day decline in major averages. Historically, this type of move is associated with a major crisis, not a minor event such as this one. The probable cause of this rapid correction was due to a small rise in Consumer Price Index (CPI) expectations, hardly a crisis. However, this set off a frenzy of higher interest rate predictions, which in turn had a negative effect on stock prices.

Now it seems the entire investment community has joined the betting pool of forecasting how much longer and higher interest rates will go. We would argue that much of what the Federal Reserve has broadcasted is priced into the markets. The crowd’s fears are often not correct. As the saying goes, if one person stands up in a football stadium, he or she will be able to see better. But, it’s not true that if everyone stands up they collectively will have a better view. Since everyone seems to be standing up and watching the interest rate, inflation, and recession show, it may be time to look the other way. It wouldn’t be the first time the crowd’s judgment is being impaired by not being able to see the field.

Most importantly, we believe it’s quite possible inflation has peaked and investors may not yet be taking notice. Historically, money supply growth has closely correlated with inflation. Pandemic-era money supply growth (stimulus) is highly connected with the current inflation rate. However, we are past that amount of stimulus now, and both money supply growth and the CPI have been falling recently. As a consequence, inflation expectations in both markets and consumer surveys are falling sharply. This has potentially major positive long-term implications for the stock market. The market generally bottoms once annual inflation rates peak. Interestingly, the peak rate of inflation so far this year was in June, which happens to coincide with the stock market low so far this year. Of course, we have a few months to go and the market lows may or may not hold.

No one knows how high interest rates will go, including the Federal Reserve, which is data dependent. However, with recession fears rampant and the economy slowing down rapidly, we believe it’s quite possible the Fed could pause their current highly restrictive stance and take their foot off the interest rate accelerator. This would be another potential positive for stocks.

Fall has already blessed us with a September surprise, and this may not be the last of it. However, keep in mind that we are not too far from a generally positive period for the stock market, which is November through May. This part of the calendar has historically been an advantageous time to be fully invested.

If you would like to discuss your portfolios, please give us a call.

We are very appreciative of your trust and business.

Best Regards,

Glen J. Ness, AIF®, CFP®	Heather O’Hanlon
First Vice President/Investments Portfolio Manager – Solutions Program	Registered Client Service Associate