September Market Recap: Wall Street Slumps with High Inflation

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Declines in stocks and bonds accelerated in September. The most recent consumer inflation reading delivered an 8.3% headline number for year-over-year price increases in August. While this was only modestly ahead of expectations, the report initiated a spike in market volatility, suggesting a fair number of people had been harboring some confidence that inflation had already peaked and was headed down.

Fed’s Rates & Remarks

Continued market fixation on the Fed leaves us in a period where good news for the economy is bad news for stocks, and vice versa. The Fed raised short rates by 0.75% at their September meeting, with the Fed funds rate now targeted at 3% to 3.25%.  One year Treasury bonds are yielding close to 4%, implying more hikes to come. Probably more important than the actual rate hike was a continued hawkish tone, including Chairman Powell mentioning several times that the battle to contain inflation would require some “pain” to bring it back toward target.

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Why Continue Investing?

In a rather bleak global backdrop where it seems almost everyone “knows” things are going to get worse, many are asking why should they invest or stay invested now? In our view, the answer is that staying invested in a diversified strategy, along with periodically rebalancing, provides the best chances for success and helps reduce the odds of debilitating behavioral mistakes.

Every bear market feels awful and scary, but all of them eventually come to an end with a new cycle beginning.

The Impact of Elections

The upcoming elections are proving to be more interesting than previously expected. Republican momentum has slowed and both houses of Congress are now up for grabs. As it relates to asset prices, which political party is in power tends to matter less than most people believe. Divided government can be a constructive backdrop for stocks because it leads to less legislation and therefore less uncertainty. While suspenseful for those who are interested, we don’t expect these midterms to have much impact on markets in the near term.

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