October 31, 2022

Market Update


A belief in peak hawkishness + prevailing pessimism of money managers (making them underweight) could keep this rally going. Fear of missing out perhaps? The market rallied, despite the widespread belief that this is a bear market rally, only making the Fed more aggressive.


  • The decline in earnings growth for Q3 has largely been applied to growth stocks. Investors are expecting strong earnings from value companies.
  • The Justice Dep’t is investigating PE firms to determine whether they violate antitrust laws by placing executives on boards of companies in the same sector.
  • GS strategists said conditions for a stock market bottom are not yet in place as stock prices do not reflect the latest rise in real yields and odds of a recession. If we have a severe economic downturn, GS expects the S&P 500 to go below 2,900.
  • Bank of America says that there is limited room to run for this bear market rally. They say that it is too early for a Fed pivot “absent sudden collapse in inflation and payrolls.” They said that the Fed normally starts cutting only after the unemployment rate exceeds 5.5%.

Bonds, Interest Rates and the Dollar

Yields had the largest decline in three months as traders considered the possibility that Fed might back off aggressive rate hikes by year-end. After 12 weeks of bond losses, bonds rallied after the prior Friday’s comments from Bullard and Daly. As the market bet that the Fed would temper the pace of its rate hikes, the dollar fell. We may be seeing peak growth in the economy.


  • The 30-year fixed-rate mortgage rose 22 bps to 7.16%.
  • Global issuance for high-yield corporate bonds dropped 73% through Oct. 24 (YoY) ($206.7B vs. $775.5B).
  • The amount of negative-yielding debt worldwide has fallen to just over $1T and consists entirely of short-dated Japanese securities.
  • Bulls say that a global recession and heightened geopolitical tensions in Europe will bolster demand for the dollar.

The Fed

The market has started to believe that there is a good chance that the Fed will only raise 50 bps in December. This is causing the stock market to rally. Bankers have not discussed the potential dangers of QT occurring at the same time as the rate increases. We are seeing the synchronized withdrawal of central bank liquidity and financial conditions could deteriorate.


  • Softening earnings may play into Fed’s goal for bringing down inflation.
  • Enough wealth destruction has started curbing price excesses. The decline in stocks is equivalent to 54% of GDP (whereas it was only 14% during Volker’s tightening).
  • They seem to be emphasizing “higher for longer,” rather than “higher.” This gives the Fed more time to see the effects, but it will take longer and expectations could become unanchored.

Economic News

After two quarters of negative GDP growth, Q3 GDP was up 2.6%. Consumer spending grew 1.4%, a slower pace than Q2. These are confusing times with consumer prices still rising, household spending under pressure, a cooling housing market, an inverted yield curve, and low unemployment.

Rent gains are finally slowing. Household formation has turned negative – young people are staying with parents or we’re seeing multiple roommates. Wages aren’t keeping up with rents and this explains the problem. Sales of new homes fell 10.9% (MoM) in Sep. Mortgage rates rose to 7.16%, the highest since 2001. The median sale price of a new home was up 13.9% YoY to $470,600.


  • A 75-bp rate increase next week and 50 bps in December, eventually reaching 5% in 2023.
  • 3⁄4 of the economists forecast a recession in the next two years and most of the rest see a hard landing w/ a period of zero or negative growth ahead.
  • Contract signings to purchase existing homes dropped 10.2% MoM, the sharpest drop since April 2020. Pending sales are down 30.4% YoY