Equities were hampered by the Fed's "hawkish pause" and a looming budget deadline.
The Fed decided to give the market a gut-check last week as fears over higher interest rates for longer may have been confirmed. Of the voting members of the Fed, 12 of 19 indicated one more rate hike in 2023 may be appropriate. In addition, double-speak from Fed Chairman Powell didn’t help matters. While stating that achieving a “soft landing” was still the Fed’s primary objective, he also stated that he wouldn’t put such a scenario as a baseline expectation. And yet, the Fed’s own projections released from the meeting show an improvement in GDP from +1.0% in June to +2.1% in September.
We have another showdown in Congress as a budget deadline for October 1st is looming.
One of the key debates concerns Defense Spending and aid to Ukraine. While there will be wringing of hands over this, we need to remember that the U.S. government has shut down 20 times since the 1970s, with the average return for the S&P 500 Index being +0.04%. In other words, markets typically don't fall apart even though the government may be shut down. Volatility picked up as a result last week, after being relatively docile for the past few months. Equities seem to be stuck in a holding pattern for now despite positive economic data. Though the broad S&P 500 Index is up double-digits for the year, the equal-weighted S&P is barely positive. Diversification has under-performed this year due to a handful of stocks and a couple of sectors that have led the market. The deluge of data due, plus Fed speeches, will likely make trading choppy this week. However, if we remember seasonality, the 4th quarter could provide a nice end to the year for equities.
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