Broker Check

The Manley Macro Memo

September 26, 2022

Don't Fight the FED!


  • After a sharp summer rally, the bear market resumed in mid-August. Stocks declined as inflation remained elevated, and Federal Reserve Chair Powell stated, "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses." The Fed's hawkish message indicated that the dovish policy pivot Wall Street expected next year was unlikely.

  • In our view, the first leg of the bear market, which was driven by declining valuations, ended on June 16th, when stocks were extremely oversold, and investors were fearful. Then, non-fundamental factors and the false "Fed Pivot" narrative fueled a sharp eight-week bear market rally that ended on August 16th. Currently, stocks are in the second leg of the bear market, driven by a weakening economy and declining corporate profits.

  • Despite inflation at a 40-year high and the Fed aggressively hiking interest rates to slow the economy, Wall Street expects corporate profits to grow by 14.4% next year. While Wall Street is bullish about 2023, market-based indicators show that a recession is likely next year. Since corporate profits have a median decline of 17% during recessions, we believe that stocks are vulnerable as earnings estimates are revised lower.

  •  Stocks remain overvalued, earnings expectations appear unrealistic, and the Fed sharply raised interest rates from 0% to 3.25% in six months to slow the economy. In this high-risk environment, we remain underweight equities relative to our benchmark, and we are invested in defensive sectors of the market (utilities, staples, healthcare, and value) and long the safe havens (gold and long-term U.S. Treasury bonds). We continue to believe the S&P 500 will fall by another 14% to 3200 and bottom near the mid-term election, as the corporate earnings disappoint and the economy heads toward recession. In this high-risk period, we will continue to focus on preserving capital and managing risk until market volatility declines, the economy stabilizes, and the stocks offer a better risk reward.