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Kevin Matras   
Profit from the Pros
By Kevin Matras
Executive Vice President
Zacks Investment Research

Stocks Down To Start The Week

Stocks closed lower yesterday to start the week.

The Dow, which has eluded an official bear market call all year, finally dipped into bear market territory yesterday by closing below the -20% threshold. From their all-time high close to yesterday's lowest close of the year, they are down -20.5%.

The S&P, which has been in a bear market since June, put in their bear market lows shortly thereafter. Then they went on a 17% rally over the next month and a half. However, they turned around and started heading back down just as quickly. The S&P's June lows are still intact (by a razor thin margin). But they eclipsed June's low close yesterday with the S&P now down -23.8% from their all-time high.

The Nasdaq and the S&P are still above their June lows and low closes. But they are down -32.7% and -32.2% from their all-time high closes.

Last week's move by the Fed to raise rates by another 75 basis points, combined with a higher terminal rate forecast of 4.6% by early next year (previously expected to be 4.0%), continues to weigh on stocks. The midpoint is currently at 3.13%, which means we can expect to see another 150 basis point hike in rates.

The next Fed meeting isn't until November.

In the meantime, we'll get another look at inflation with the CPI (Consumer Price Index) and PPI (Producer Price Index) reports in October. While both remain near 40-year highs, they have ticked down from their summer highs.

Nonetheless, inflation has proven to be stubborn. Once believed to be transitory, it's now feared to be entrenched. So we will need to see a sustained move down before the market or the Fed reads too much into it. But every lower reading will likely be cheered as it will bring relief to the economy and signal that rates may not need to go as high as currently believed, or stay as elevated as has been suggested.

In addition to inflationary fears, is the impact on the economy. Namely, will higher interest rates cause a prolonged recession?

As you know, we unofficially entered a recession after Q2 GDP declined by -0.6%. That followed Q1's -1.6%. (Two quarters in a row of negative GDP is the definition of a recession.)

But Q3 is forecast to show positive growth (albeit not by much at this point). And Q4 is expected to be even better. (A recession is no longer a recession once the economy starts growing again.)

One of the bright spots of the economy has been the labor market. And we'll get another look at that next week (October 7), with the Employment Situation report.

But that's roughly two weeks away.

Before then, we'll get a slew of additional reports starting with today's Durable Goods Orders report, the Case-Shiller Home Price Index, New Home Sales, the Richmond Fed Manufacturing Index, and Consumer Confidence.

We'll also hear from Fed Chair, Jerome Powell, as he gives the opening remarks at the Community Banking Research Conference in St. Louis, MO. We'll also hear from Fed Board Governor, Michell Bowman, as she will give a speech following Mr. Powell.

It's been a tough year this year. And it still is.

Stocks appear oversold based on current expectations. And valuations are at multiyear lows.

The lower they go, the bigger the snapback will be. The question is how much lower do they have to go until then?

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research


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