Investors fled for the exits on Friday, driving a selloff in both stocks and bonds to cap a brutal week, as the market transitioned quickly from worrying about stubbornly high inflation to a sense of rising alarm over the Federal Reserve’s aggressive tightening campaign. The Dow Jones average plunged 486 points Friday to finish at 29,590, while the S&P 500 fell 1.7% to end at 3,693, after both benchmarks dipped below their year-to-date closing lows set on June 16.

Recession is quickly becoming almost a certainty. Expectations for a soft landing have gone out the window following the latest Fed meeting on Wednesday. The question, now, appears to be how hard of a hard landing will there be. The US housing market has gone from FOMO (Fear of Missing Out) to just plain fear. Bidding wars are fading and sellers are ratcheting down expectations. The cracking of the housing market coupled with the 10-year Treasury yield crossing 3.5% for the first time since 2011, while the rate on the 2-year Treasury rising to a 15-year high of 4% (yield inversion) are almost sure signs that a recession awaits all of us.

Future Wealth’s View 

There were several key revelations at the Fed meeting this week that re-emphasizes our view from last week that things are going to get worse.

1. Inflation will remain very sticky which means that the Fed can keep raising interest rates but inflation will not come down commensurately. The problem is that the Congress and Fed are not working in tandem. Earlier last week, California announced that eligible Californians will receive a one time direct payment of up to $1,050 as a form of inflation relief in a matter of weeks, as prices continue to rise for consumers. Alaska soon followed and we expect every state to provide inflation relief in some form or the other. But the irony is not lost on those of us who see this as another government program that provides free money to consumers who will spend it, further driving up inflation.

2. The Fed’s sole objective as stated on the call is to slow the economy down and drive up unemployment which in turn will lower wage growth and consequently, inflation. But, all of these are lagging indicators. An interest rate hike takes anywhere between 6-12 months to reflect its impact on the economy. How does the Fed know when to stop the rate hikes? This question was asked on the call but received no convincing answer.

3. Finally, it appears to us that the Fed is putting its mistakes on the economy. Why does the middle class have to suffer with higher unemployment and US corporations have to witness a decline in earnings due to the Fed’s mistakes? Not to mention that with every interest rate increase, the US dollar is getting stronger driving up the possibility of a global recession.

As it stands, risky assets (Tech, Housing, Banks) are all in for a prolonged decline. Value stocks paying a good dividend are the only safe haven. This has been our strategy for our clients all year long and has enabled our clients to take shelter when the market has all but collapsed.

As far as what we could expect from the Fed in the coming months – The Fed wanted to retire the word “transitory” with respect to inflation last year, retire the word “pivot” with respect to interest rates this year, we think the best course of action for next year will be to retire Jerome Powell himself from the position of Fed Chair.