Market Commentary

Key takeaways
Investors have been betting in recent weeks that the Federal Reserve (Fed) would pause or even pivot from the rate hike process sooner rather than later.
Based on our current analysis, it appears the markets may be too early in assuming the skies are clear.

Over the course of the last week or so, bond prices have rallied big time. A clear example is the 10-year Treasury note. In just a handful of trading days, the yield has tumbled approximately 40 basis points (100 basis points equals 1%) from 4.2% a week ago to 3.8% at the time of this writing. Stocks have put on a similar show as the S&P 500 (SPX) rose nearly 6% in last week’s trading. And looking at equities on a slightly longer-term time horizon, the SPX has jumped almost 12% over the course of three weeks. These represent huge moves as investors digest weekly earnings and economic reports that in many cases have come in weaker than expected.

So, what gives? “Weaker” is a key word that was the driver last week as the year-over-year change in the much-watched Consumer Price Index (CPI) for October came in two-tenths lower than expected (7.7% vs. 7.9%). The headline reading for this inflation gauge takes into account the food and energy components that consumers (and investors) get to live each and every week when they go to the grocery store (or look at the menu prices at their favorite restaurant) or fill up their gas tanks. At this point of the cycle, when investors are ultra-focused on inflation and what the Fed is going to do about it, it didn’t take much of a difference between consensus expectations on economic data and the actual result to drive stocks and bonds one way or the other. We have seen this happen numerous times over the last few months as economic data has been released. We suspect that if the CPI number had come in two-tenths (or even one-tenth) above the consensus estimate, the market action may not have been as pretty.

Investors have been betting in recent weeks that the Fed would pause the rate-hike process in the near term. Some pundits have even expected a Fed “pivot,” or a lowering of interest rates, sooner rather than later. In our opinion, both possibilities seem unlikely in the near term. In our view, for a pivot, inflation needs to come down faster, and that’s most likely to happen in a recession. We believe we’ve only just begun to see the layoffs and squeezes on profit margins. A reduction in the magnitude of rate hikes has been hinted by some recent Fed speakers (i.e., Fed Vice Chair Lael Brainard and others). However, while we agree that the magnitude of individual rate hikes may be reduced, we believe there are multiple hikes to come as we look ahead to the coming months and as we cross into the New Year.

We recommend that investors not chase this current equity rally. Our positioning remains defensive as we expect the U.S. economy to fall into recession very late this year or early in 2023. We expect this recession to last until mid-year or perhaps just a bit beyond. Based on our current analysis, it appears the markets may be too early in assuming the skies are clear. We do not feel the current rally should be sustainable.

Risk Considerations

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities.

Investments in fixed-income securities are subject to interest rate, credit, liquidity, prepayment, extension and other risks. Interest rates change over time due to market conditions and changes in government policies. Bonds with longer durations are generally more price sensitive and volatile than those with shorter durations. Because bond prices generally fall as interest rates rise, the current low interest rate environment can increase the bond’s interest rate risk. Credit risk is the risk that an issuer will default on payments of interest and principal.

U.S. government securities, including Treasury securities, are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk.

Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.


Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

An index is unmanaged and not available for direct investment.
General Disclosures
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