The Fed has repeated many times that it will continue tightening until PCE inflation recedes to their target of 2%. Fed Chair Powell has said that this will cause “pain,” which most interpret as meaning a recession.
The linked Bridgewater article shows data indicating that stocks have declined only to the extent that is caused by rising interest rates. Stocks have not yet priced in the expected drop from a recession. This is an excellent article which clearly explains that tightening will take a long time and that the markets (stock and bond) have much further to fall.
The rising USD is making it hard for multinational companies to compete in foreign markets and also reducing the USD values of profits made in foreign currencies.
Lower profits and anticipation of a recession are not good for stock prices.
Rising interest rates are also bad for bond values. The standard 60/40 portfolio is falling as both stocks and bonds are dropping at the same time. This is rare. It’s the worst drop since 1980.
The Wall Street Journal, Oct. 9, 2022
I expect continued upward pressure on inflation, meaning higher rates are required to meet the Fed’s 2% target and the stock-bond link will be more like the 1970s and 1980s. Workers have gained political power, governments are more willing to run big deficits, deglobalization and outright protectionism have reduced cross-border trade and efficiency, and there won’t be a repeat of the shock of hundreds of millions of Chinese workers suddenly competing in the world economy…[end quote]
The whining and screaming about the Fed needing to stop their tightening has already begun. Rear view mirror and all that. But Fed Chair Powell is very aware of the resurgence of inflation in the 1970s when Fed Chair Arthur Burns listened to those pressures. Powell wants to be Volcker, not Burns. The Fed will continue tightening.
The markets still don’t grok this because many of the traders can’t remember a time without a Fed put. But I think that this time Powell is supported by the rest of the FOMC.
The Control Panel shows that all trends are continuing. Both stock and bond prices are falling, but the SPX is falling faster than the 10YT.
The Fear & Greed Index is in Extreme Fear but not bottomed out. The Treasury yield curve is still rising and is inverted along its entire maturity except for the fed funds rate. It will be fully inverted once the fed funds rate climbs above 3.5% as expected by the end of 2022.
Financial stress has risen to the level of 2016 but not to crisis levels. Ditto junk bond spreads.
The METAR is for autumn weather, cool and rainy. The Fed is clear that they will be pushing the Macro economy into winter but it’s not there yet. All signals are deteriorating but there is no sign of panic or revulsion…yet.
I am buying 6 to 9 month Treasuries and mortgage bonds on the secondary market to hold to maturity for a safe yield.