“Mama said there’ll be days like this, There’ll be days like this Mama said.”- The Shirelles

The Dow and the S&P 500 were down about 5% for the week. The June 16^th lows were breached intraday for the S&P 500. Chances of recession are going up, according to JP Morgan. They are about at a coin flip over the next year and 74% over two years. Also, more market commentators are starting to raise the specter that the Fed may over-tighten. The Fed’s Summary of Economic Projections (SEP), also called the dot plot—but this week, you can call them the dots of doom. All components of the DJIA were negative for the week. The VIX spiked to its highest levels in months and settled just under 30. We ended up closing about 25 points above the June lows for the S&P 500, but the Dow closed at its lowest level in 2022.

There is a character in Greek mythology called Sisyphus. The Gods punished him with the fate of rolling a boulder up a hill for all of eternity, then watching it roll down and starting again. Tasks or professions with a similar quality of being impossible to complete and repetitive are sometimes called Sisyphean tasks. If you haven’t realized it yet, markets and the pursuit of gains through them meet the definition pretty well. It's hot, then it's cold. You're on top, then you're deep in the red. Indeed, the first book on markets ever written by a Dutch trader named Joseph de la Vega introduces markets to his readers with this same mythological allusion.

Philosopher: And what kind of business is this about which I have often heard people talk but which I neither understand nor have made efforts to comprehend? And I have found no book that deals with the subject and makes apprehension easier.

Shareholder: I really must say you are an ignorant person, friend Greybeard, if you know nothing of this enigmatic business [stocks] which is at once the fairest and most deceitful in Europe, the noblest and the most infamous in the world, the finest and the most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; it is a touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster, and finally, a counterpart of Sisyphus who never rests as also of Ixion who is chained to a wheel that turns perpetually.

-Confusion of Confusions, Joseph de la Vega, 1688

So when you look at the screen on a day like today and start cursing yourself, remember that markets have perplexed people for hundreds of years and hopefully will for hundreds more. Days like today and the ebb from bull to bear market and back again are like the rolling of Sisyphus’s rock. We have multiple methods of looking at markets to produce research that helps one navigate the inevitable ebbs and flows of the market. After the hot CPI report this month, our team advised that tactical weakness was highly likely going into October. Markets face a persistently hawkish Fed that appears dead-set on keeping rates restrictive for longer. Equities had benefited from There is No Alternative (TINA), but with rates moving so high, that previously existing source of price support is increasingly precarious. Fixed income, which has had a historically bad year, looks more attractive relative to equities. The 10-yr settled at 3.687%.

The apparent catalyst this week was the FOMC meeting on Tuesday and Wednesday. Jay Powell didn’t give investors a whole lot to be happy about. The dots showed a higher terminal rate than the market expected. The SEP also showed that the Fed expects and intends for growth to moderate significantly. Other things in the background also soured sentiment. Ukrainian forces have recently had breathtaking offensive gains against their Russian adversaries. Vladimir Putin was reprimanded at a Central Asian summit by the Indian and Chinese heads of state for his invasion of Ukraine. Predictably, he lashed out in the face of humiliating setbacks, ordered the mobilization of 300,000 reservists, organized sham referendums to annex the eastern territories, and made veiled nuclear threats. He is rumored to have lost his trust in the military and is now micro-managing the campaign.

The Energy sector, one of the only places to hide so far in 2022, was slammed and was down 7% at close . Materials, also a relative respite, were down sharply, suggesting concerns about demand are mounting after Powell’s address. Energy is now at levels only seen before Russia's February invasion. On Thursday, the Japanese government intervened to support the yen for the first time since the late 1990s. South Korea is also deploying reserves liberally to shore up the won.

The UN met this week, and President Biden spoke about the importance of upholding the UN Charter by not allowing Russia’s invasion to be successful. While some may fret about the economic consequences of an ongoing conflict in Ukraine, it’s important to remember that sometimes these efforts have a very profound and positive effect on the future when the rule of law and self-determination are allowed,  with the help of the world, to prevail against tyranny, oppression and economic despair. The United Nations deployed forces 72 years ago to help the beleaguered government of the Republic of Korea push back an onslaught from a similar unprovoked invasion.

There is perhaps no more stark example of the power of a free way of life, the kind of country where markets flourish and citizens prosper, versus totalitarianism, isolation, and jingoism, as the two sides of the 38^th parallel. On one side, you have South Korea, a flourishing democracy that is a lynchpin of the global economy and a technological leader. On the other side is North Korea, a veritable hell where freedom of expression is banned; poverty is incomprehensible, and the shameless regime routinely uses torture and violence against its oppressed citizens. Imagine the cost had the United Nations not acted. Imagine how different the world be without the resolve shown by Korean and UN forces. War is always horrific and tragic, but wars of self-preservation are necessary, and the support given by the West is being put to good use by our Ukrainian allies.

The Fed decision roiled European markets, and many have reached new lows. European currencies are reaching multi-decade lows versus the dollar. The new UK government released a significant wave of tax cuts. The pound and UK bonds both were pummeled. Investors are concerned about the stimulative impact of this policy when inflation is running at multi-decade highs. These concerns are compounded by the generous energy subsidies the UK recently announced, estimated to cost around 60 billion pounds. The UK’s new Prime Minister is pursuing classic supply-side economic policies associated most closely with former President Ronald Reagan. Some critics believed the policies were naïve and would result in the pound sterling getting below parity against a persistently strong US dollar. It will be an interesting real-world experiment in economic philosophy and we’ll keep you updated on progress. Companies with more than 50% of their revenues outside of the US in the S&P 500 had earnings growth about a third as high as the average last quarter.

There have been a string of downgrades across the economy. Morgan Stanley cut expectations for AMD. Others cut Micron. Goldman Sachs also cut a number of stocks and their target for the overall index. The effect of Fed tightening was once compared to an old hotel shower by Larry Summers, who was Treasury Secretary and almost became a Fed Chairman himself. The idea is that there’s a lag between the actual hikes and the effect they have on the economy, similar to when you turn the handle and expect hot water to come, but there’s a delay. Then suddenly, it’s too hot, and you’ve scalded yourself. If you take the Fed at Powell’s word from his September process, it seems like the water’s about to get pretty scalding. Many market participants were trying to get out of the shower today to avoid getting burned. The Fed has turned the knob to hot, saying they will keep it there for some time.