Too Hot to Handle

Weekly Market Update | October 17, 2022


Globally, stocks edged lower with the MSCI All Country World Index sliding 1.9%. In the United States, returns were mixed with the Dow Jones climbing 1.2% while the S&P 500 fell 1.6%. The NASDAQ underperformed most indices with a 3.1% tumble. Equity markets overseas were mostly lower with European stocks slipping 0.5% while emerging market stocks dropped 3.8%. The 10-year U.S. Treasury yield rose 14 basis points to 4.02%.

Both the labor market and inflation appear to be too hot to handle for the Federal Reserve. Monetary policymakers now seem to believe that in order to tame inflation, labor markets must cool as well.

Interestingly, the dynamics to bring down core inflation are likely already in place with 30-year fixed mortgage rates now north of 7%. That should lead to lower home prices (and therefore lower shelter prices in the consumer price index) over the next two years. However, the Fed appears hesitant to acknowledge improving forward-looking inflation metrics. We suspect that the Fed fears doing so would test investor resolve.

History suggests that U.S. stock market returns may improve once the Fed raises rates for the last time. During the last six tightening cycles, the S&P 500 averaged a return of about 16% in the 12 months that followed the last rate hike.