Not a lot good to say after a week like this.   Stocks, bonds, and commodities all closed in the red for the week.   About the only safe haven were U.S. dollars as currencies around the world slipped against the greenback.  For all the talk the last few years about how the U.S. dollar was doomed and bitcoin was the ultimate answer, during times of stress investors still search for safety in dollars.

The immediate catalyst for the selling was, of course, the Fed announcement on Wednesday.  As expected, the Fed delivered a third consecutive 75bps rate hike. 

These 75bps moves almost seem normal now, but in a historical context they are very unusual. Since 1992 there have only been a total of four such rate hikes (including the three since mid-June).

The bullet points from the Fed meeting are short and sweet:

–           Raised rates by three-quarters of a point to 3-3.25%

–           The Fed board now projects rates at 4.4% by the end of this year.  This implies another 75bps in November followed by 50bps in December.

–           Ultimately, the Fed thinks rates will top out at 4.6% next year (up from 3.8%).

–           They see unemployment rising to 4.4% next year.

The third bullet point is the one that probably unnerved the market the most, but we have to take these projections with an enormous grain of salt.  The chart below shows each Fed projection going back to December 2021.  Not exactly flattering.

The latest rate move puts further pressure on housing.  Mortgage rates legged higher again as you would expect.

And it doesn’t take a genius to point out that higher rates = worse housing affordability. One way of showing this is what income is necessary to qualify for the average home in the U.S. Last year you needed roughly $60K/year. Now it is close to $90K.

Of course, with the markets the way they have been the last few weeks you can cut the pessimism with a knife.  As a matter of fact, the level of bearishness is at historic highs. 

The AAII sentiment survey has been around for decades, and it is always interesting at extremes.  It turns out that individual investors are more pessimistic about stocks than they have been in 13 years.  The percent of bears, or those who think stocks will fall over the next six months, shot up to 60.9% for the week ended Sept. 21, from 46% the week before.

That is only the fifth time it has been above 60% since 1987, with the last time being the week ending March 5, 2009.

We aren’t necessarily arguing this is a buy signal, after all, the reading has been over 70% before.  But extremes like this have been notable contrary indicators in the past.  Time will tell.

Charts We Found Interesting

1 – Sterling fell 3.5% against the dollar to below $1.09, its lowest point since 1985, after UK chancellor Kwasi Kwarteng took a huge political gamble with a debt-financed package of £45bn of tax cuts.

2 – Why is this a big deal?   Because the U.K. relies on capital from overseas to fund itself.  As it turns out, the U.K. runs the largest current account deficit (a measure of how much capital they need to import each year) of any of the large developed economies.

3 – The U.K. is in a tough spot.   Weak currency and a need for capital equates to higher rates to entice capital into the country.   Yields on 5-year government bonds were up 0.5% during Friday’s trading.  This was the biggest single day move in history (or at least Bloomberg’s history).

4 – Speaking of weak currencies, the euro hit a multi-year low on Friday.

5 – Back in September 2017 the Austrian government issued a 100-year bond priced to yield 2.112%.  They raised more in mid-2020 at just 0.88%.  Since then, the bond has lost 68% of its value.

6 – Remember the shipping problems from a few months ago that was driving up rates?   Well, that’s not a thing anymore.

7 – Many people in the U.S. are directly impacted by 6%+ mortgages because they have a loan.   That isn’t the case in Australia, Ireland, Korea, or Spain.  The U.K. also has a problem.

Have a good weekend.

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