Market Monitor: Gut Punch

Market Monitor: Gut Punch

September 21, 2022

The market rallied in July with investor hopes that inflation had peaked, we’d see continual signs of prices easing, and the Fed, in turn, would slow down.  The latest inflation report hit like a gut punch, swiftly changing market perspectives, at least for the near term.  

What happened with inflation?

The latest inflation reading came in hotter than expected.  Saying the markets and investors were flustered is an understatement; the worst included a big one-day drop of more than 4% for the S&P 500.  

Year over year, headline inflation came down for the second straight month.  While that sounds good, the problem is a large portion of that decrease was due to a  5% drop in energy and a 10.6% drop in gas prices.  On the other hand, food, shelter, and medical costs all increased.  Excluding food and energy costs, core inflation rose more than expected and was higher than the previous month.  To put it lightly, it is disappointing that prices remain so stubborn.   

Investors hoped that signs of slowing economic growth and moderating prices would soften the Fed’s tone and actions.  These hopes sparked a rally in July. Unfortunately, on the back of still hot inflation, the Fed will likely continue it’s aggressive (hawkish) decisions.  We will find out later today, September 22nd, what that exactly will look like.  

A look at the election:

There are a significant number of hot-button political issues that are at stake right now, such as abortion, energy, climate, health care, etc.  Every election season is important, and this one is no different.   

The prevailing thought for the last year was that there would be a red-wave in the House and Senate, with republicans taking control of both.  History is on the Republican's side.  Since World War II, the party controlling the White House has lost an average of 26 seats in the House and 4 seats in the Senate.  If you believe the pollsters (and who does) it looks like the Republicans will take control of the House.  The Senate, though, might be a different story.  Despite high inflation and low (but improving) approval ratings for Biden, the Democrat's chances for keeping control of the Senate seem to be improving and is now a toss-up.  

The next month will be like every election season; an absolute deluge of dramatic attack ads full of half-truths and tall tales.  Historically, markets have underperformed in the 12 months leading to a mid-term election and then have done well in the following 12 months.  To be fair though, the underperformance usually means a flat, not a negative, 12 months like we see today.  It’s been relatively challenging for Democrats to fulfill their complete agenda over the last two years with slim control in the House and Senate.  It will become even more challenging depending on how Republicans fare.  In our view, there are multiple positives of split control, including the potential to actually see some bipartisan work on big issues.  


 For the year, through 9/20/22:  

  • The S&P 500 is down 18.16%
  • International Indexes (MSCI EAFE) is down 22.42%
  • Bonds are down 12.87% 


The Smart Investor:

It’s hard to do nothing when it feels like we are speeding down a hill with no brakes, but that’s exactly what we recommend.  Remember, bear markets do not last forever.  The average bear market historically has lasted around 15 months, with the shortest being a mere 33 days.  Unfortunately, there is no crystal ball or magic symbol pointing out exactly when a bear market is about to begin or about to end, making timing the market near impossible.  Unless your situation calls for otherwise, we continue to urge you not to make fear-based changes.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East. 

This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.