Medicare Agent News: No More Fighting the Fed

Tuesday, September 27, 2022

No More Fighting the Fed

By Connor Smith | Friday, September 23

Testing the Lows. The major U.S. indexes fell again today, capping off a dreadful week for stocks in the wake of rising interest rates around the world.

The Dow Jones Industrial Average fell 486 points, or 1.6%, Friday to close at its lowest levels since Nov. 20, 2020. The index avoided closing in bear market territory by about 150 points.

The S&P 500 fell 1.7% to fall 4.7% on the week. The benchmark index has fallen for five of the past six weeks. The Nasdaq Composite fell 1.8% to cap off a 5.1% weekly decline. Its the worst two-week span for the tech-heavy index since the week ending March 20, 2020. Oil prices also dropped below $80 a barrel, the lowest since January.

Investors have finally stopped fighting the Fed. The 2-year Treasury yield rose to 4.212%, a multi-year closing high. Barron's Jacob Sonenshine and Jack Denton write that the 2-year yield is a barometer of expectations for the federal funds rate. The 10-year Treasury yield—a barometer of long-term inflation and economic growth expectations—settled down around 3.695%. Jacob and Jack write:

Overall, higher rates are spooking the stock market. The fear now is that a soaring cost of borrowing at home will reduce economic demand and put the economy into recession. That presents a headwind for corporate earnings.

"Sometimes the bond market takes out the stock market and that's exactly what's happening,” wrote Louis Navellier, founder of Navellier & Associates.

Bond yields were also on the rise overseas. The U.K. 2-year and 10-year government bond yields gained, also hitting new multi-year highs. That makes the usually higher-yielding U.S. bond market slightly less attractive, forcing selling of U.S. bonds, lowering their prices and lifting their yields.

Barron's Randall Forsyth likens the goal of central bankers trying to achieve a "soft landing" to landing on an aircraft carrier. Randy writes:

The Federal Reserve may be seen as a pilot trying to compensate for an errant landing approach by employing a steep descent and sharp deceleration. By rapidly raising its short-term interest rate target from virtually zero earlier this year, to 3%-3.25% this past week, via its latest sharp 75-basis-point hike, the central bank is attempting to bring down the inflation that it thought was transitory in 2021. (A basis point is 1/100th of a percentage point.)

Investors have begun to accept that the Federal Reserve will continue tightening until inflation is under control. Randy concludes:

With the S&P 500 threatening its June 16 low of 3666.77 Friday morning and more than 1,100 points below its Jan. 3 peak of 4796.56, sentiment already is bearish. The key message for investors: Don’t look for the Fed to come to the rescue. The central bank’s main concern now is for the economy to touch down safely on the carrier flight deck in rough seas.

As Dad used to say, good luck and happy landings.

You can read more of Randy's Up and Down Wall Street columns here.

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