Both stocks and bonds experienced further price declines in the 3rd quarter, but began the month of October on a stronger note. In fact, last week we had a one-day reversal that was the most dramatic point swing in the Dow Jones average in history (from down 500 points to up 800 points). The market volatility has been extreme and yet we continue to believe the Federal Reserve has gone a long way toward accomplishing its goal of reducing inflation. Monetary policy operates with a time lag and the data can be confusing and misleading. Rents, housing, energy and retail items on sale are all indications of waning inflation.
This week multiple corporate earnings are being announced and we will see whether lowered earnings expectations are actually exceeded by the results. So far, in the banking sector for one, earnings have been better than expectations. In our last letter, we suggested a substantial market recovery by year end. We believe that a favorable seasonal environment as well as getting through the mid-term election, plus our belief in an eventual Fed “pause” will be the catalysts for better markets.
