Talking Points: September 30, 2022

The markets and the Fed now are in agreement on one thing: something will have to break in order to get inflation under control.

Today’s stock market reversal highlights this new parallel thinking:

• The Fed is focused on the labor market and believes it must loosen (i.e., there needs to be higher unemployment) in order for prices finally to ease.
• Weekly jobless claims came in today below expectations and have continued to fall steadily since July.

And so good economic news—more people have jobs—is bad market news because it means more rate hikes from the Fed.

The S&P 500 is set to fall to a new bottom today (it’s about -24% away from its peak).

• The average drawdown for the S&P 500 around recessions is -30%.
• The headline index has closed negative 56% of its trade days so far this year. Since 1957 this is the index’s second-most negatively-biased year. The most negative year (in terms of closing negative) was 1974 when 58% of trade days were negative.
• Just 15% of S&P 500 companies are trading above their 200-day moving average; just 7% are trading above their 50-day moving average.

The Dow fell into a bear market for the first time since 2020. Both the Dow Industrials and Dow Transportation Averages are in bear markets. Long Treasuries are having their worst 1-year performance ever (they’re now down over -30% year-over-year). Including inflation to give us the real return, this is the worst performing year ever for the 60/40 portfolio. 

• The 60/40 is down -20% ytd. With inflation it’s down -27%, worse than 1974’s terrible real return of -25%.