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ETF Tracker Newsletter For September 23, 2022

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GETTING SLAMMED

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Thanks to a last hour comeback, the markets were able to avoid a far worse outcome, as the Dow was down over 800 points, which was its low for the session.

Still, the major indexes, and the broad market, got hammered again, with the Dow closing below its 30k level for the first time since June 17 and scored their 5th negative week out of six, as the S&P 500 tumbled 5.2%.

It was a brutal five trading days, as surging rates and foreign currency upheaval left their marks and confirmed that a global recession is indeed a real possibility. It appears that the markets have now transitioned from the meme of inflation concerns to worries about an aggressive Fed trying to slay the former at the cost of a sharp economic slowdown.

Carnage best describes the market action of today, this week, this month, and this year, as ZeroHedge correctly called it. After all, with the S&P 500 having lost 10% of its value in just the past two weeks, simply goes to show how fast things can change when reckless monetary policy comes to an end, and all bubbles, real estate, bonds, and stocks, begin to burst.

Bond yields surged this week with the 10-year getting close to touching its highest point since April 2010. The US Dollar rose causing the British Pound to dive to its lowest point since February 1985. Ouch!

If you have not learned by now that there are times to be out of the market and on the sidelines, you should not read this blog. After all, I have been pounding on that theme for decades, namely that all good things, like artificially low interest rates, as well as Quantitative Easing (QE) programs, will have eventual consequences like inflation and subsequently surging interest rates, which is what we are seeing right now.

What could change the current scenario?

If the recession/depression gets so bad that the Fed will be forced to pivot and reverse its strategy from hawkish to dovish, that would pump some life not only into equities but will also worsen inflation. Right now, there is no good outcome other than avoiding further portfolio damage by being on the sidelines, so you can avoid participating in a scenario that gets worse, before it gets much worse.

There is a ‘lost generation’ of money managers out there, who have never seen a bear market and have only, throughout most of their careers, lived by the mantra that the Fed will bail them out via easy monetary policy, should markets decline by some 20%. That time is over, with ZeroHedge quoting the following:

Back in February 2020, the former Dallas Fed chief offered some more thoughts about Wall Street’s ‘lost generation’.

“The Fed has created this dependency and there’s an entire generation of money-managers who weren’t around in ’74, ’87, the end of the ’90s, and even 2007-2009… and have only seen a one-way street… of course they’re nervous.”

“The question is – do you want to feed that hunger? Keep applying that opioid of cheap and abundant money?”

Simply put, investors must be weaned off their dependency on a Fed put and accept the reality that the ‘wealth’ they thought they had was paper profits and not real.

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