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What Financial Advisors are Telling Their Clients Today?

Updated: Aug 27, 2023

November's burst of buying in the stock market slowed last week, as all of the major averages posted losses, but nothing too dramatic.

he Dow ended about 0.1% lower—basically flat. The S&P lost less than 1% for the week, while the Nasdaq ended 1.5% lower. All three indexes are still positive for the month, and well off those October lows. But steeper inversions in the U.S. Treasury market are warning of tough times ahead. The full U.S. yield curve inverted last week, with the one-month Treasury bill yield rising above the 30-year Treasury bond yield. The last two times that happened: August to September of 2019—which was followed by a recession beginning in March of 2020, and August 2006 to August 2007—which was followed by a recession that started in January 2008.

Investors are looking for some solid footing and consistent messaging from the Federal Reserve as to the path of future rate hikes. And what we got last week from several Fed officials is that the path to the central bank's terminal rate remains pretty steep. St. Louis Federal Reserve President James Bullard said Thursday that the policy rate is not yet in a zone that may be considered sufficiently restrictive. According to Bullard, the appropriate zone for the federal funds rate could be in the range of 5% to 7%, which is higher than what the market is pricing.

That's the first time we've heard that 7% number for the terminal rate from the Fed, and looking at Fed fund futures from the CME, traders did not have that higher range in their forecasts. The highest target range is between 5% and 5.25%, which traders expect to occur by May of 2023. That mismatch of expectations may have led to some of the selling we saw last week. Inflation is cooling, to be sure, but maybe not fast enough for the Fed, which doesn't want to be perceived as behind the curve yet again.

Charles Schwab is out with its latest trader sentiment survey for the fourth quarter, and there are more than a few signs of optimism in trader land. Keep in mind—these are traders, not necessarily long-term investors, but since they're putting money to work more frequently than a lot of us, it's worth paying attention to how they feel. Some key takeaways from the survey? Sixty-eight percent say they are still bearish in the fourth quarter, but they still see opportunity in the energy and healthcare sectors, as well as value stocks. That jives with what we have been seeing in terms of market performance lately, and what we might expect given concerns about a recession.

To wit, nearly all respondents feel an economic recession in the United States is at least somewhat likely, with many suggesting it will begin, or has already begun, in 2022. Rising interest rates, inflation, and political issues—both domestic and international—are their top concerns, which kind-of sounds familiar. These have been the dominant walls of worry in our reader sentiment surveys and just about everybody else's.

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