October 2022 Market & Economic Outlook Report

We believe the US economy is very resilient relative to the rest of the world and will avoid a major recession in 2023. We also believe inflation is declining steadily and corporate earnings are likely to continue to be resilient.

  • The Fed has decreased the money supply by 17.5% so far this year, which has caused the dollar to appreciate and mortgage rates to skyrocket. This will set the stage for inflation to decline over the next year.

  • The key risk to the economy is an erratic and incompetent Fed that has a horrendous track record of forecasting inflation. We are near-term neutral on the market as an overly hawkish Fed and bad seasonal factors weigh on the market resulting in an S&P range of 3,600-4,200 during the Fall.

Stock Market Outlook:

The recent rise in interest rates has caused our fair value estimate for the S&P to drop 700 points to 3,800, based on the current 10-year interest rate of 3.70%. We expect the stock market to rally in the 4th quarter as inflation continues to decline, long term interest rates decline, we enter earnings season, and the election results are confirmed.

  • We do not expect a major recession in the US in 2022 due to a very resilient housing sector with an ongoing shortage of housing and tail winds from the enormous 80% US energy cost advantage relative to the rest of the world. We expect 2022 economic growth to slow dramatically into the 0-2% range due to erratic and very hawkish monetary policy.

  • We expect a slow-down in the housing sector but no major decline in construction, which would result in a recession as we have a shortage of homes in the US. The ratio of households to houses is approximately 110% which is below the average for the last 50 years and well below the peak of 120% reached during the financial crisis. In addition, the total inventory of houses for sale is at an all-time low of 1.3MM homes vs. 4.5MM homes for sale at the peak of the 2009 financial crisis. The national vacancy rate is close to an all-time low of 5.0% vs. the peak of 11.1% during the 2009 financial crisis.