Higher For Longer Message Weighs on Market

Performance for Week Ending 9.23.2022:

The Dow Jones Industrial Average (Dow) finished off 4.00%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) lost 5.07%, the Standard & Poor’s 500 Index (S&P 500) fell 4.65% and the Nasdaq Composite Index (NASDAQ) shed 5.07%. Sector breadth was negative with all 11 of the S&P sector groups closing lower. The Energy sector (-9.00%) was the worst performer followed by Consumer Discretionary (-7.02%) and Real Estate (-6.44%).

*See below for Index Definitions

MARKET OBSERVATIONS: 9/19/22  – 9/23/22

Stocks indices finished sharply lower for a second straight week following the more hawkish than expected rate outlook from the Federal Open Market Committee (FOMC) meeting. As widely expected, the FOMC boosted rates by another 75 basis points (bps) at the conclusion of last week’s meeting, pushing the target range for the federal funds rate to 3.00%-3.25%. However, the Fed's updated projections for the federal funds rate pointed to an even more aggressive push by the Fed to fight inflation, with the FOMC expecting the federal funds rate to top 4% by the end of this year. The updated “dot plot” now implies that the Fed will push the funds rate up another 125bps, which suggests the possibility of another 75bps rate hike in November followed by a 50bps rate hike in December. The FOMC's new forecast sees the midpoint of the fed funds rate range at 4.6% at the end of 2023, up from 3.8% expected in the June projections. The committee's revised economic projections acknowledged the toll that higher rates will take on the economy. The Fed is now projecting GDP growth of just 0.2% in 2022 and 1.2% in 2023, down from the June forecast for growth of 1.7% in both years. The labor market is also expected to cool with the unemployment rate seen rising from 3.8% in Q4 2022 (3.7% previously) to 4.4% (3.9% previously) at the end of 2023. Lastly, the Fed expects inflation to be higher to be higher for longer compared to June, with core PCE inflation accelerating to 4.5% year-over-year in 2022, up from 4.3% in June, and advancing 3.1% in 2023, up from 2.7% in June.

The more aggressive stance, assuming the Fed follows through, severely reduces the odds that the Fed will be able to maneuver a soft landing (i.e. a slowdown in growth but no recession). Fed Chairman Powell likes to give himself optionality and this was evident in his press conference following the conclusion of the Fed meeting. Powell noted that “the pace of rate hikes will depend on incoming data,” and “decisions will be made meeting-by-meeting” while adding that at some point “it will become appropriate” to slow the pace of rate hikes. These statements suggest that the “dot plot” projections are not necessarily set in stone and the Fed will be flexible based on the incoming data. However, at this stage futures markets are taking the Feds word for it with the probability of another 75bps hike in November at 80 percent and the likelihood of another 50bps in December at nearly 92 percent.

Economic Data a Mixed Bag: The Conference Board's Leading Economic Index (LEI) declined 0.3% in August, the sixth consecutive monthly decline. The latest contraction was widespread among the various components. Only initial unemployment claims and the yield spread made positive contributions while ISM's new orders index, expectations for business conditions along with new building permits deteriorated. The LEI has contracted by 2.7% over the six-month period between February and August, reaffirming the deceleration in economic momentum under the weight of stickier inflation, rising interest rates, and a more cautious consumer. In what’s likely to be another blow to the housing market, Freddie Mac reported that mortgage rates rose for a fifth straight week, with the average rate on a 30-year fixed loan surging to 6.29% from 6.02% last week. The Labor Department reported that initial jobless claims rose 5k in the week ended September 17 to 213k, a level that was in line with expectations. Claims for the prior week were revised down by 5k to 208k. The latest week's data pushed the four-week moving average for initial claims down 6k to 223k, the lowest since early June.

The Week Ahead: Consumer-driven economic data will be front and center in the week ahead with reports due out on Personal Consumption and Expenditures (PCE) and personal income and spending data. The reports should provide a good gauge to the extent of inflationary pressures and how it has impacted the strength of the consumer. In other data, the consumer confidence index, durable goods orders, and new home sales will also be watched closely. The Fed speaking calendar will be jammed packed with 21 presentations on the docket, including two appearances from Fed Chairman Powell. Following the jump in rates and drawdown in the equity markets, it will be interesting to see if Fed Heads stick to the script from last week’s FOMC meeting. Earnings reports continue to slowly creep back into the picture with 6 members of the S&P 500 scheduled to release results during the week.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.