Federal Reserve Chairman Jay Powell remains in uber-monetary tightening mode utilizing higher interest rates, continued quantitative tightening, and equally important, increased tough jawboning to get inflation expectations, notably his, under control. After the Chairman’s most direct August comments at the Jackson Hole Conference, he once again spooked equity markets in mid-September with his FOMC remarks. This coupled with the new UK government’s proposed actions to stimulate demand via high-earner tax cuts, which further weakened the British Pound, already suffering from slower economic growth due in recent part to rising energy prices linked to Russia-Ukraine activities, sent equity markets into turmoil after stabilizing earlier in the month.
For the full month of September, Equity markets were largely in negative lock step as most global regions declined in the 5%-8% range due to higher interest rates. The uniform performance suggests to us that macro events are overly weighing on equities, resulting in investor indifference towards company-specific fundamentals.
We believe there is now a window for equity markets to recover. The issue is will it be a mere bear market bounce or a more sustainable rally? Valuation levels are more compelling at 15.0X forward 2023 consensus estimates. Corporate buybacks we expect will be a 4Q catalyst, as should US mid-term elections. Equities have generally outperformed in the 4Q in mid-term election years.
We believe Chairman Powell is presently over-compensating for his 2021 monetary easing mistakes which is taking a toll on both the stock and bond market.
If/when his comments become less domineering, we expect equity investors to quickly turn constructive. US GDP figures continue to weaken giving the Chairman the needed runway to pivot. Should however he linger, 2023 corporate earnings expectations we expect will begin to be reduced, as recession prospects will likely increase.
ACTION PLAN: Now is the time to start planning year-end 2022 tax-selling strategies and developing investment views for the new year. Unsure where to begin? Let us Help.
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Advisory Services offered through MRA Advisory Group, a Registered Investment Adviser. Investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security or (ii) tax or legal advice