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Market Brief – September 2022: The Plot Thickens

September 2022 Market Brief

The Plot Thickens

“Though this be madness, yet there is method in’t” – William Shakespeare, Hamlet 2.2.205

In fiction movies and books there is an interesting term called a MacGuffin. A MacGuffin is an object, device or event that is necessary to the plot and motivation of the characters, but insignificant, unimportant, or irrelevant itself1.  Most famously, the Indiana Jones movies are full of them, including the Raiders of the Lost Ark with the Ark of the Covenant ending up completely irrelevant and locked in a warehouse. I bring up the MacGuffin term as I feel it pertains to markets right now. The Fed, in a way, is a MacGuffin. The Fed react to economic data (it’s the economy stupid!) and the Fed’s narrative drive market movements up or down. This makes the Fed a plot device to move us along the economic cycle. We get worked up over the Fed, and certainly what they do influences the market as we preach Don’t fight the Fed! But in the end, its more about where we are in the business cycle and overall economic health. The Fed is just an outlet and a player to focus our energies on.

The Fed next meets September 20th – 21st to discuss hiking rates another 0.50% or 0.75%. The magnitude of the hike will depend on August inflation numbers and jobs reports. The Fed seems the singular main character driving markets, however, in reality it’s the economic data that matters. What is the health of the economy and the US Consumer? On one hand, we have record low unemployment and the JOLTS (Job Openings and Labor Turnover Survey) is reading over 11 million vacant jobs. This speaks to a very strong jobs market, which historically has meant higher wages, higher spending, and faster economic growth. On the other hand, you see high inflation, shrinking GDP, and Manufacturing numbers not supporting expansion and growth. Historically, there was a strong, positive correlation between a robust jobs market and a healthy and growing economy. 2022 has seen a divergence, and leaves investors and markets questioning what direction the world is truly heading. We are also facing seasonality headwinds as September is historically the weakest month of the year, with the average return on the Dow -1.11%. As the Fed takes center stage again in this month, be ready for volatility and plot twists!