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Tomorrow is a Big Day for the Stock and Bond Markets: Market Commentary from Cabana’s CEO – September 20, 2022

2 years ago

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Last week, August CPI (inflation) data came in above estimates, which put additional upward pressure on interest rates and provided support for the Federal Reserve’s hawkish position on continuing its rate hiking cycle for the remainder of the year. The bond market is now forecasting the fed funds rate to be north of 4% in 2023. The 10-Year Treasury note has broken above 3.5% and is at its highest level in more than a decade. In my view, this means that mortgages are likely to move all the way to 7% (or more) before this is all over.  

Stocks quickly sold off last week, reversing a four-day rally that began the week before. The selling has continued unabated since. The major indices are all mired in a technical bear market, with each below their respective 50- and 200-day moving averages. Important technical support at the 3900 level for the S&P 500 has also been violated. To add some context to all this, FedEx last week reported earnings missing estimates and downgrading guidance going forward. Its shares immediately dropped 20%. FedEx is a bellwether company that has its finger on the pulse of the worldwide economy. This fact alone should give us pause to consider whether we are just now beginning to see the effects of the rising rates on the economy. To date, markets appear to have priced in a mild recession and are in the process of reevaluating the possibility that something worse is in store. This is leading to a repricing of risk assets and thus the declines in stocks. 

The Federal Reserve is meeting this morning and will announce its decision on further rate increases tomorrow afternoon. This is likely to result in a big move one way or the other, depending on the market’s perception of the outlook. Most analysts and talking heads are predicting another 75 basis point hike. The most important information to come out may be whether the Fed indicates future hikes will moderate. There are two more meetings scheduled in the fourth quarter. If the market decides to “sell the news” I would expect the June lows to be quickly tested. For reference, the S&P 500 was down approximately 25% at that time and we are already within striking distance of that number. The bigger question is if those lows will hold. As I see it, this is a very dangerous market, and anything is possible – including a swift rally. Suffice it to say, tomorrow is a big day for the stock and bond market. 

Disclaimers

January 17, 2024

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Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

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The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq