Weekly Market Update: October 3, 2022

The Federal Reserve’s main priority right now is to stabilize prices. The combination of stubbornly high inflation, reflected in August consumer and producer pricing data, and a tight labor market, is not giving the central bank any reason to pause the ongoing rate hikes. The resultant rising interest-rate environment has pressured equities and bonds, with the major equity averages retesting their mid-June lows in late September.

The economy is faced with the most aggressive monetary tightening stretch since the 1980s. This has included three-consecutive 0.75% hikes to the benchmark short-term interest rate, bringing the range to 3.00% to 3.25%. The Federal Reserve also raised the 2022 federal funds target to 4.40%, which suggests more heavy lifting on the interest-rate front by year’s end.

The central bank’s increasingly restrictive monetary policies have pushed Treasury yields to heights not seen in more than a decade. The yield on the two-yearTreasury note recently topped 4.30%, a 15-year high. The rate on the 10-year Treasury note, which is used as a proxy for setting long-term mortgage rates, also is on the rise. The higher lending rates—and resultant decrease in the money supply—are likely to reduce business investment and consumer borrowing, which is a key piece to the Fed’s goal to slow demand and ultimately stabilize prices. This process is unfolding in the housing sector, where higher mortgage rates are pushing more buyers out of the market.

Will the Fed’s hawkish monetary policies produce a “hard landing” for the U.S. economy? The continued inversion of the yield curve and recent drop in oil prices suggest that the economy may be headed toward a recession. The picture is even worse overseas where growth is sharply slowing in China and the euro zone economies are struggling, with the latter region facing a possible energy crunch this winter, especially with reduced oil and gas shipments from Russia looking very likely due to sanctions against that nation.

Conclusion: The prospect of the Federal Reserve continuing to aggressively raise rates in a slowing growth environment has rattled WallStreet. And with the month of October historically being a very difficult one for stocks, we recommend adhering to a cautious near-term investment strategy.

Source: ValueLine.com