September 19, 2022

Market Update


The stock market faces slower economic growth while central banks are trying to slow inflation, which has not subsided meaningfully.

Q3 earnings growth estimates have dropped from 9.8% to 3.7% since June. Seven of 11 sectors are now expected to show YoY earnings declines. In periods of high inflation, earnings have historically peaked just two months prior to the start of the recession. A total of 240 companies mentioned recession in their earnings calls.


  • On Tuesday, more than 400 companies of the S&P 500 dropped. This has happened 79 times this year. If this continues, it would be the most in any year since at least 1997.
  • An analysis of the 15 major routs since 1937 shows peak-to-tough price drops averaged 28% (vs. our current 20%).
  • Powell has made clear that the Fed will not stop. No central banker wants to be considered to be the next Arthur Burns.


The market’s mistake was that peak inflation will allow the Fed to ease. Some things have certainly improved: Covid restrictions, shift away from goods (helping supply chain), and oil. But wages are growing and Fed officials keep saying that they’re not going to change.


  • The median CPI was 9.2% -- the highest since it started in 1983.
  • While gas prices were down 10.6% MoM, they are up 27.1% YoY. Groceries were up .7% MoM and 13.5% YoY. Housing increased .7% MoM and 6.2% YoY.
  • Rents comprise more than 30% of headline CPI and ~40% of the core. It’s big and it’s persistent. Rents and wages are correlated. To fix rent, you need higher unemployment.


A recent academic paper argues that labor market tightness added 3.4% to underlying inflation in July 2022. The paper suggests that to get inflation to 2%, we will need an average unemployment rate of 6.5% in 2023 and 2024. A recent study suggests that Covid has reduced the labor force by 500K.

The Fed

The Fed hasn’t raised rates by a full percentage point at one meeting since it began using the Fed funds rate as its primary tool for setting monetary policy in the early 1990s. There is fear that the Fed is simply focused on tight labor markets and not considering that continuing to raise rates will weaken foreign currencies and that this will eventually hurt US growth.


  • It will take 12 – 18 months of lower shelter costs to work through to inflation.
  • The market is now pricing in a 75-bp increase this week and a terminal Fed funds rate of 4.40% in May 2023.
  • The funds rate reached 20% in early 1980. Inflation was just under 15%.

Real Estate

While home prices are still relatively strong, construction and sales are dropping to recession-like numbers. Construction industry profits are suffering from high input costs and growing inventory (of new homes).

Maybe this is a good time to buy for first-time homebuyers? Prices have dropped slightly. There’s less competition to buy right now b/c of affordability. If a buyer gets a 6% mortgage and rates come down, they can refinance. If rates increase, they’ll be happy with their 6% mortgage. If rates drop without a recession, prices will increase.


  • The median existing home sales price was $403,800 in July. This is 10.8% higher YoY, but below the June 2022 record of $413,800.
  • Inventory of existing homes is low due to homeowners being locked in by their low mortgage rate. New weekly listings are down 17.5% YoY.
  • The 30-year mortgage rates reached 6.02% last week.

Household Income

The Census Bureau said median household income was $70,800 in 2021, not statistically significant from the inflation-adjusted 2020 estimate of $71,200. Totals in 2020 and 2021 were boosted by government spending.


  • The top 20% of households had incomes above $149,100 and collected 52.7% of household income.
  • The top 5% made $286,300 and collected 23.5% of all income.
  • Median earnings for 2021 rose 4.6% to $45,500. Among workers who worked full-time, year-round, median earnings dropped 4.1% to $56,500.