What Happened to Goldilocks? Three Hot Takeaways From Last Week's Cold Market

DEWITT, Mich. - Oct. 9, 2023 - PRLog -- The summer celebration in the stock market, to the tune of an impressive 19% rally from March through July, has given way to a new phase in which equities are almost exclusively reacting to interest-rate moves.* The midyear rally was powered by the growing goldilocks outlook – the view that the economy would proceed just right, not too hot to require more Fed rate hikes, and not too cold, sliding into recession. Such an outcome isn't an unachievable fairy-tale ending, in our view, but the narrative at the moment has transitioned to one of anxiousness around the Fed overstaying its welcome by keeping policy too tight for too long. As a result, bond yields have been firmly behind the wheel, with the surge to 15-year highs sending stocks lower.

Market pullbacks are rarely comfortable. And with the current bout of weakness stemming from rising rates, this may feel like we're headed for a sequel of 2022. The catalysts for and the downstream implications of the spike in interest rates should not be dismissed, but here are three reasons we think 2023 can still have a happy ending:

1. We may be approaching a peak in interest rates.

• Ten-year yields moved above 4.8% last week, a rate last seen in 2007. Admittedly, longer-term rates have shot much higher than we forecast this year, including rising 0.5% in the last few weeks alone.*
• It's this recent jump in rates that, interestingly, gives us some confidence that we may be near an exhaustion point. In 2022, long-term rates surged amid the powerful and sustained push from four-decade-high inflation and historically aggressive Fed-policy rate hikes.

2. The labor market continues to work for consumers.

• The September employment report showed the labor market is holding up well in the face of interest-rate headwinds. Payroll gains were 336,000 last month, the best since January, an acceleration from the previous three-month average of 190,000, and double the consensus estimate for the month. This held the unemployment rate steady at 3.8%, which, has been accompanied by a growing number of workers joining the labor force.

3. One year on, the market's recovery has history on its side.

• This week, stocks will reach the one-year anniversary of the 2022 bear-market bottom. We've maintained the view we held coming in to 2023 that last October's low would ultimately prove to be the starting point of a new bull market.

Source: *FactSet, S&P 500 Index and 10-year U.S. Treasury bond yield.