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Jeffrey P. DeHaan, CFP®

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Special Market Update – September 22, 2022

John E. Chapman September 22, 2022

Yesterday the Federal Reserve Board (Fed) voted unanimously to raise rates by three-quarters of a percentage point bringing the federal funds rate to 3.00 – 3.25%. More importantly, updated forecasts for future rate increases reflect a more hawkish path through 2023.

We now expect another 75-basis point hike at their next meeting in November, followed by a 50-point hike in December. Additional, albeit smaller, rate hikes will likely continue into 2023. As of today, 12 out of 19 FOMC members expect Fed Funds between 4.50% and 5.0% by the end of next year.

Simply put, Fed officials now expect rates to remain higher for longer. If there is a silver lining to all of this, it is that historically the Fed has an awful track record of predicting the future path of inflation and interest rates. Just one year ago, the Fed proclaimed that inflation would be transitory (falling to 2% by the end of 2022) and that they were unlikely to raise rates until 2024. How did that work out for them?

We must also remember that the Fed is very focused on managing expectations. They want financial conditions to remain tight (low stock prices and elevated interest rates) until inflation begins to break. That is the main reason why Powell was extremely hawkish in Jackson Hole and now again in the September meeting.

All of this certainly explains why the equity markets are under pressure with the major indices such as S&P 500 and Nasdaq trading just above their June lows. The risks of a Fed policy mistake are rising, and we now expect stocks will retest those levels with further downside in the days ahead.

The Fed finds itself in the difficult position of battling inflation as the economy shows clear signs of slowing and they now appear willing to sacrifice economic growth for lower inflation. The Fed’s new forecast for 2023 GDP growth is 1.2% with an unemployment rate of 4.4%. We have long believed the Fed was very late in recognizing the surge in inflation, and now they are attempting to make up for lost time even if it risks pushing the economy into recession.

The question now is, have we reached peak hawkishness with nearly all relevant players expecting rates to go much higher. Leading indicators for both the economy and inflation are showing sharp decelerations and we believe inflation peaked earlier this year. We expect inflation, growth, and interest rates will move below current expectations in the next 3 to 12 months.

Even as economic activity is slowing at a more rapid clip because of the Fed’s tightening, the economy is not collapsing. If inflation turns out to be decelerating faster than many currently believe, as is our perspective, the Fed may not have to go as far as they are now forecasting. This would be welcome news for equity markets, but it will take time to play out. The best thing investors can do today is remain focused on their planning horizons and not panic.

Please let us know if you have any questions or would like to schedule time with us to dig deeper into our outlook. As always, thank you for your continued trust and confidence in Clearwater Capital Partners.

John E. Chapman

disclosure

THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”)  DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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