Week of October 10

Soft economic data early last week raised hoped that the Federal Reserve (Fed) would soon pause its monetary tightening cycle in its battle to curb 40-year high inflation, and the market subsequently rebounded off its near two-year lows.  But the stronger-than-expected jobs report on Friday – reported 263,000 when 250,000 was expected – dashed the Fed “pivot” narrative and stocks plunged with the Dow dropping 630 points, or 2.11%, S&P 500 slid 105 points, or 2.8%, and the NASDAQ plunged 421 points, or 3.8%.

Still, the Dow, S&P 500 and NASDAQ had the first positive week in the last four.  All remain down substantially so far in 2022, and the NASDAQ is less than 1% away from its 52-week low.

“The direction of the stock market is likely to be lower because of either the economy and corporate profits are going to slow meaningfully, or the Fed is going to have to raise rates even higher and keep them higher for longer, said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, on Friday.  “Given the conditions that we are operating under, we believe it’s prudent to begin preparing for a recession,” he added.  “The talk of a shallow recession that is now the narrative-du-jour strikes us as eerily similar to the inflation is transitory” narrative of last year.”

Anticipation and anxiety are running high in guessing the actions the Fed will take at its next meeting scheduled for November 1 and 2.  Conventional wisdom is calling for the Fed to raise short-term rates another 0.75% (75 basis points).