Equity markets stumbled for the second week in a row after US Federal Reserve policy members repeated previously stated intentions of taming inflation with further aggressive rate increases in the coming months. The TSX held up better than other North American equity markets despite oil losing over 7% in the week. The Dow and the S&P 400 MidCap Index fell below the June lows, while the S&P 500, Russell 2000 Index and Nasdaq managed to hold the lows of June 2022. The technology sector continued to slip more than other sectors for the second week. North American markets were not in isolation as European equities followed suit, posting steep losses for a second week. Japan followed the US, but China fared better, with the Shanghai Composite losing 1.2% and the Blue-Chip CSI 300 Index losing 1.9% in the week.
Economic data preceding the Fed rate announcement centered on the housing market starting last Monday, with the National Association of Home Builders (NAHB) home builders index coming in lower than expected, falling 3 points. This is the ninth month in a row that the index has fallen. The latest reading of 46 is the lowest reading since May 2014. With mortgage rates above 6%, builders are having difficulty attracting traffic. All regions in the US suffered declines, and measures of current sales conditions, prospective-buyer traffic and expectations for the next six months were all weaker.1 On Tuesday, the US Census Bureau and the US Department of Housing and Urban Development released August’s latest residential building permits. Privately‐owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,517,000, 10% below the July reading of 1,685,000. Housing starts, however, were seasonally adjusted and were up 12.2% above the July reading.2 Early on Wednesday, before the Fed announcement on rates, the US National Association of Realtors stated existing homes sales fell 0.4% in August to 4.80 million annualized. The median home price increased by 7.7% to $389,500, moderating from the 20% surge from last year.3
After the Federal Reserve Chairman announced an anticipated 0.75% interest rate hike, speculation centered around the language in the news conference; Chairman Powell, in the news conference, said he anticipated additional rate hikes by year-end with the terminal rate of 4.6% sometime next year, and inflation at 2.8% by year-end 2023. Further, he stated the committee has a “strong resolve” to bring inflation back down to the 2% long-term goal. Initially, the equity market responded with a move higher before diving for the remainder of the afternoon and into Thursday and Friday. Many investors were hoping, with the economic indicators flashing a slowing of growth, that the Chairman might offer a pause by year-end or early in the new year to allow the impact of higher rates to work through the system before forging ahead with a “strong resolve.” Instead, he confirmed the “higher for longer” approach, indicating that the Fed doesn’t see any rate cuts until 2024.4 It is doubtful we have seen the end of the market response.
On Thursday, the Labor Department reported for the week ending September 17, the initial unemployment claims increased by 5,000 to 213,000 from the previous week’s reading of 208,000. Benefits for all programs for the week ending September 3 was 1,295,702, a decrease of 96,414 from the previous week.5 Also, on Thursday, the Conference Board’s latest release of the Leading Economic Indicators showed a decline of 0.3%, the sixth month in a row the index fell. The LEI indicates economic health, and over the last six months, the economy has been slowing at a rapid rate compared to last year. The conclusion many are reaching is that a recession for next year is more likely than not, especially when considering the latest statement from the US Federal Reserve.6
The old saying “don’t fight the Fed” is somewhat forgotten. We encourage investors to listen to the language coming from the Fed members and the Chairman, which has led many to conclude that we are far from out of the woods and that equity markets may be in for more volatility and likely lower lows in the coming months and weeks ahead. We believe that the trek lower will not be without rallies, which are likely to be short-lived.
Sources:
2 https://www.census.gov/economic-indicators/
4 https://www.federalreserve.gov/newsevents.htm
5 https://www.dol.gov/ui/data.pdf
6 https://www.conference-board.org/topics/us-leading-indicators
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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