Lather, Resolve, and Repeat

Weekly Market Update | September 26, 2022


Globally, stocks struggled last week as fears of a global recession increased with central banks across several developed markets tightening monetary policy. The MSCI All Country World Index tumbled 5.0% while the S&P 500 slumped 4.5% and the Dow Jones slipped 4.0%. The tech-heavy NASDAQ dropped 5.1% as interest rates ratcheted higher with the 10-year U.S. Treasury yield climbing 24 basis points to 3.68%.

The Federal Reserve warned financial markets to expect further rate hikes at its Jackson Hole symposium (lather), then delivered a 75 basis-point rate hike at its September meeting (resolve), and then suggested another 100-to-125 basis-points of rate hikes by year-end 2022 (repeat). In addition, Fed officials raised their forecasts from the terminal fed funds rate from 3.4% to 4.4% in 2023. This aggressive path has increased the odds of a U.S. recession.

During the “hard landings” of 1973, 1980, and 1981, inflation fell by an average of 7.5% over the next two years while the unemployment rate rose by an average of 3.4% (much higher than the 0.6% rise the Fed is predicting). Barring some help from the supply side of the economy, it would not be surprising to see unemployment rising steadily in 2023.

Although market volatility remains high, S&P 500 returns are often quite strong following the Fed’s last rate hike. During the last six tightening cycles, the S&P 500 rallied an average of 15.8% in the 12 months that followed the last rate hike. That performance improved to 25.1% over 24 months.