Talking Points: September 23, 2022

The stock market is now confronting the unavoidable: entrenched inflation and a Fed Chairman ready and willing to be the next Paul Volcker.

In this unusual post-pandemic macro environment the Fed’s dual mandate—full employment and stable prices—are in direct conflict.

• With the employment rate at just 3.7% the Fed has made the correct judgment call that defeating inflation should be their primary focus for the foreseeable future.
• As Chairman Powell stated, a failure to tame inflation with current economic pain would only lead to far greater pain in the future.

And so stocks have seen extreme volatility and have sold off about -10% since the Jackson Hole speech.

Stocks sold off on yesterday’s 75 basis point hike and Powell’s hawkish comments in his afternoon press conference. Some choice quotes:

• “It would be nice if there was a way to just wish it [inflation] away, but there isn’t.”
• “We think we need to have softer labor market conditions.” I.e., the Fed is willing to tolerate higher unemployment.
• “We have got to get inflation behind us. I wish there were a painless way to do that; there isn’t.”

The S&P has again fallen -20% from its peak and the Nasdaq has again fallen -30% from its peak. Both last saw these low levels in July before the summer bear market rally.

Just 15% of S&P 500 stocks are trading above their 50-day moving average; just 10% of Nasdaq 100 stocks are.