Market Perspective for September 26, 2022

It was another troubling week for the major market indexes, capped off by a brutal Friday. The market turmoil has been blamed on rising interest rates, and the markets are very concerned about the Fed pushing us into a recession.

Stocks were smacked on Friday, with the Dow Industrial Average losing 486.27 points or 1.62 percent. The S&P 500 fell 1.72 percent, and the Nasdaq Composite tumbled 1.8 percent. That marks the fifth out of six weeks that the major market indexes finished in the red. At one point during Friday’s, trading session, the Dow was down over 826 points.

For the week, the Dow Jones Industrial Average dropped 4 percent, the S&P 500 gave up 4.6 percent, and the Nasdaq Composite lost another 5.1 percent. The Dow hit a new low for the year, closing below 30,000 for the first time since back on June 17. The Dow ended the day 19.9 percent below their intraday record, putting it near bear market territory.

Year-to-date, the Dow Jones Industrial Average has lost 18.6 percent, the S&P 500 is down by 22.5 percent, and the Nasdaq Composite has lost a whopping 30.5 percent.

After the Federal Reserve’s interest rate hike by 3/4 of a percent, the markets started to slide. Even though the 75 basis point increase was widely anticipated, stocks continue to fall. Stocks did continue to move lower all week, mainly because of the Fed’s comments on its outlook for further rate hikes.

The Federal Reserve now expects to keep rates higher for longer in the continued effort to fight inflation. It is now clear to the markets that the Fed is willing to cause some pain in the economy to stop consumer prices from continuing to rise.

Even though the Fed was trying for a soft landing and a strong economy, they now seem to have accepted that a meaningful slowdown of the economy is necessary for inflation to drop to a comfortable rate.

These comments changed expectations on Wall Street that the Fed funds policy rate will now peak at 4.5 percent and a little higher. To achieve that, the Fed will have to raise rates more than 1 percent higher from where they stand currently.

All of this has only increased the fears that the chances of a deeper recession possible. Now that the markets are expecting and pricing in a recession, a recession doesn’t have to mean market prices will continue their downward trend.

The Federal Reserve indicated they will continue rate hikes until they hit 4.6 percent at some point in 2023 to meet this goal, it implied a 25 basis point hike in 2023, without decreasing rates next year. The 4.6 percent rate is known as the terminal rate or the endpoint. The Fed funds rate now stands at a range of 3 percent to 3.5 percent, the highest rate since early 2008.

Federal Reserve Chairman Jerome Powell said at his post-rate hike news conference, “My main message has not changed since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2 percent, and we will keep at it until the job is done.”

Bonds are now in their worst bear market since 1949. Bonds were down 1.6 percent last week and down 13.3 percent for the year. As yields on bonds continue to rise, bonds are selling off.

And adding to fears of an upcoming recession, the yield curve remains inverted. The yield on the 2-year U.S. Treasury is 4.2 percent, and the yield on the 10-year U.S. Treasury at 3.68 percent.

The housing market continues to slow. According to the National Association of Realtors, sales of previously owned homes dropped 0.4 percent in August from July. Other than the short pandemic dip, this is the slowest pace since November 2015.

Interest rates are making homes less affordable and prices are still higher than a year ago. In some cities, prices are coming down, but in other cities, prices are rising, just not as fast as last year. The median price of an existing home sold in August 2022 was $389,500, up 7.7 percent from August 2021.

Home sales fell in all home price categories but were more noticeable in the lower price range. Sales of homes priced between $250,000 and $500,000 are down 14 percent year-over-year. Sales of homes priced between $750,000 and $1 million were down only 3 percent.

The lower supply of lower-priced homes compared to homes in the higher price categories could also be partially to blame for this. Fewer homes for sale mean fewer home sales.

Home prices are still being supported by tight supply. At the end of August, there were 1.28 million homes for sale. At the current sales pace, that is a 3.2-month supply. Not helping the supply situation is homebuilders are slowing down because of falling demand.

Mortgage rates spiked after the Fed’s recent rate hike. The average U.S. 30-year fixed rate mortgage is at 6.3 percent, up 0.271 percent for the week and up 3.41 percent for the year.

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