There are plenty of ways to hike in the fall: whether you’re watching football or going on a trail with friends and family. However, all eyes are on the Federal Reserve’s rate hikes as they continue to raise rates throughout 2022. Since the Federal Reserve has begun its hiking cycle, there has been much speculation about when the market will bottom. There is no definitive answer to this question, as market bottoms vary depending on the Fed’s hiking schedule. However, according to the six studies referenced in the chart below, the market generally bottoms anywhere from six months prior to almost immediately before the Fed is done hiking.

Analysts have looked at past data to try to determine when the stock market will bottom as it relates to the Fed’s hiking cycle. The results vary, but most studies show that the stock market bottoms out about six months to two weeks before the Fed is done hiking rates. This means that investors need to be careful when making decisions based on Fed policy; although this can be a key indicator to when we see a market rebound. The Fed has indicated that they will continue to raise rates in November and December, but any additional rate hikes from that point on are unknown. We will continue to listen to the Fed speak to gauge their stance on future policy which can lead to a blueprint of when markets are poised for a bounce.

The chart below shows historical rate hiking cycles and when the market bottomed in relation to when the Fed was finished raising rates. In each instance, the market bottomed out in advance (or simultaneously) of the Fed completing their cycle which proves to be a key data point for us to monitor.

Source: Marketwatch

The Dollar is Large, and in Charge

The Fed’s hawkish monetary policy stance in response to skyrocketing inflation has caused the dollar to strengthen. As this trend continues, it comes with positive and negative effects on the consumer and the stock market.

On the positive side, it boosts purchasing power for American consumers abroad. A strong dollar means American tourists can buy more goods and services when visiting other countries. It also decreases the costs for businesses that are net importers from other countries which can help reduce inflationary pressures by selling their products at a lower cost.

The difficulty with a stronger dollar is that companies who are net exporters are selling at higher relative prices making their products less attractive to international clients. Also, businesses that derive much of their revenue in international markets can see those profits erode from the conversion rate of the local currency relative to the US dollar.

Overall, a stronger dollar tends to be more difficult for US businesses that work in international markets as they face more competition from other global competitors. If the dollar gets too strong, it can cause a recession since businesses and consumers will cut back on spending, and investment will decline.

Below is a comparison to the USD vs. several of the top global currencies held up against their value a year ago:

Source: Forbes

A Look at Third Quarter Earnings

Earnings season is upon us, and as always, there are a few key things to keep an eye on.

Although the recent Fed hikes have caused a significant drop in stock market gains, many analysts see positive earnings for Q3 2022. The S&P 500 is expected to report (year-over-year) earnings growth of 2.4% for the third quarter, which would be the lowest earnings growth reported by the index since Q3 2020. However, given that most S&P 500 companies report actual earnings above estimates, it is likely that the index will report actual growth in earnings of 2.4% for the quarter. This would be a slight improvement from the 1.9% year-over-year growth reported in Q2 2022.

Furthermore, when looking at the individual companies in the S&P 500, it is clear that there is still strong earnings growth potential. For example, out of the 20 S&P 500 companies that have reported actual earnings for Q3 2022 to date, 70% have reported actual EPS above the mean EPS estimate.

However, the S&P 500 has averaged an EPS surprise of 3.1%, accounting for misses and beats. This suggests that there is still room for upside surprises from companies in the index, which could lead to even more robust earnings growth than what is currently expected.


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Market Snapshot

For the Month Ending 9/30/2022 (Cumulative Returns)1

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

October is a month filled with pumpkin spice, changing leaves, and cooler weather. It’s also a month of fun holidays like Oktoberfest. Oktoberfest is a traditional Bavarian festival that takes place every year in Munich, Germany. The festival centers around the consumption of beer, and it is one of the most popular tourist attractions in Germany. Oktoberfest actually begins in September and lasts for 16 days, ending on the first Sunday of October.

It is estimated that over 6 million people visit the festival each year. The event originated in 1810 as a celebration of the wedding of Crown Prince Ludwig and Princess Therese of Saxe-Hildburghausen. Today, Oktoberfest is still a celebration of Bavarian culture, one of the world’s largest and most well-known festivals.

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

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