Market Outlook · September 30, 2022

Making Sense: September Highlights

Brent Ciliano

CFA | SVP, Chief Investment Officer

Phillip Neuhart

SVP, Director of Market and Economic Research

Making Sense: September highlights webinar replay

Amy: Hello, everyone. Welcome to the First Citizens Wealth Management webinar series, Making Sense, where Chief Investment Officer Brent Ciliano and Director of Market and Economic Research Phillip Neuhart help you make sense of what's going on in both the markets and the economy. I'm Amy Thomas, a strategist here at First Citizens Bank. While everyone's logging in and before we get started, I do have a couple of housekeeping items to go through.

First, this webinar is being recorded, and a replay will automatically be sent to you following today's conference. Secondly, this webinar is interactive. If you'd like to ask a question, please submit your question using the Q&A or chat feature to submit your question on the righthand side of the screen. All questions are confidential and only visible to myself and the panelists. I do want to remind you that we try to keep our discussion broad. So if you have a specific question about your financial plan or we're not able to answer your question during today's webinar, please reach out to your First Citizens partner.

As a reminder, the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. If you have any concerns regarding this information, we ask that you reach out to your First Citizens Relationship Manager. Brent, with that we're ready to go, so I'll kick it over to you.

Brent: Great, thanks, Amy, and good afternoon, everyone. I hope all of you are well. Wow, Phil, do we have a lot to talk about today, right? The broad swath of economic data continues to be mixed, and it's highly variable. US growth is slowing significantly. Inflation is not moderating at a rate that is making market participants or the Fed happy, and financial conditions continue to tighten.

So what we're going to cover today: Phil and I are going to get deep into the labor market and the US consumer. We're going to talk about corporate earnings and profitability and what that looks like not only now but in the future. And then, as I just mentioned, we're going to get into inflation, interest rates and the path forward for the Fed. Then we're going to shift and focus on markets. Certainly the bear markets in equities and fixed income continues. The market-related question that you and I get asked most often is, what level does the pain stop and when does it stop? Well, we certainly don't have crystal balls, but we're going to try and give you some valuation implied levels of what that might look like. And then we’re going to give you some updated data on the five reasons that you really want to remain invested and then our outlook for the rest of this year. So, Amy, why don't we jump forward and get into the economic side of things?

Let's start with the one bastion of resiliency in our economy, which is the US labor market. So Phil, in August we had 315,000 jobs created over the last 6 months—381,000 jobs, so still robust and significant job creation. On the righthand side, you can see that job openings, the JOLTS report, still sitting at 11.2 million open jobs. Now, this is certainly still a July number and we're going to get the update on October 4. And it's likely that this is going to come down a little bit. But obviously, as one can see on the chart, still significantly above long term.

Phil: Right, we're hearing from companies that the number of job openings might be coming in, right? We're hearing about hiring freezes, et cetera.

Brent: Right.

Phil: But when you look at how elevated that number is, even if it comes down a lot, we still have a very tight labor market. That's implications for the economy.

Brent: Absolutely. And you can't talk about the consumer or the labor market without talking about wages. And it's good to see, Phil, that in August, wage growth grew again at 5.2%. So two consecutive months of a 5.2% print. And again, relative to the long-term average, 15-year average of 2.9%, almost 80% above that average. But when we take in the effects of inflation on a real basis, obviously wages continue to be negative. And you can see the callouts on the left and right for, for, for, for most Americans, they are starting to struggle with everyday necessities because of the impact of higher inflation and higher prices.

When we think about some of that impact or pain, that feeds right back into consumer sentiment—how we're all feeling. And Phil, you and I covered this on the last WebEx, consumer sentiment hit its lowest level not only in the cycle but in the entire data series for the University of Michigan Consumer Sentiment at 50.0. Thankfully, that's come up a little bit to 59.5. This Friday, we're going to get an updated print. Consensus is expecting another 59.5 print. So again, keeping consumer sentiment up, the usual suspects have been cited: higher inflation, global supply chain issues and shortages, discord in Washington, D.C., which we're going to cover a little bit in a bit. But by and large, the good news is when you look at the chart on the right, it is not yet feeding back into consumer spending. And what you're looking at on that chart on the right there is, the gold line is goods spending. The gray line is services spending. And you can see relative to the callout box, Phil, that spending on both goods and services is running well above the 20-year average. And when you look at the gold line, we had goods spending moderating a good bit, it’s come back up, right. Services continue to slope down, but by and large spending, which makes up more than 74% of our economy, 69% of US real GDP comes from consumption, another 4.7% from housing. So as goes consumer spending, as goes our economy.

So let's shift gears and let's talk about earnings growth, margins, cash flows. It's been getting a lot of financial media press that the impact of higher inflation, global supply chain issues and tightening of financial conditions will feed back into lower corporate earnings and profitability. Well, the good news is, at least as of now, analysts' expectations see full-year growth for 2022 at 7.7%, or about $224 per share for this year—which again, down from where we were in June and in March and at the beginning of the year, which is closer to 10.2%, 10.4%, but not a cataclysmic fall off the cliff. And even looking forward into 2023—where most market participants and analysts are expecting some of the earnings revisions to really start to hit—we're still sitting at an 8.1% growth rate, or $242 per share. So putting that all together, both this year and next year, above the long-term average growth rate of 7.6%.

Phil: Right, as the right side shows, revisions have started. We expect 2023 numbers to continue to come in. They still have a ways to go, but they have started already. So let's flip ahead to what is on everyone's mind, and that's inflation. There is not a client meeting we do that inflation does not come up. Here, we're showing consumer price index. The headline, which is all consumer prices, is the gold line that has moderated most recently to 8.3%. But in that most recent report a couple of weeks ago, inflation was still higher than expected. So moderating but sticky, and that's a real problem. Core inflation, which excludes food and energy, actually has reaccelerated, right.

Brent: Right.

Phil: So when you think about the Fed, you think about the way markets have behaved the last couple of weeks, this is a very important chart—and that inflation has fallen on the headline, but not to the extent that the experts expected.

Brent: Absolutely.

Phil: So where might inflation move in the future? In this chart, the gray bars on the left are actual realized inflation. The gold bars are consensus estimates. This is economist consensus. This is not polling individuals. These are people with models trying to figure out where inflation is going to go. So what are the expectations? It is that inflation moderates but at a pretty slow pace. You still have really elevated numbers here. First quarter of next year, 5.8%. The Fed's target is 2%. The other thing we would point out is that consensus has gotten this wrong, right? The gold, the black diamonds rather, here are the March of this year estimates. So all of 6, 7 months ago is that, that is the March estimate. You can see how low consensus was at that point and how high they are now. So, again, inflation's moderating, but not at a pace any of us really want to see.

Brent: Yeah, and certainly at the margin when we did this last month, those numbers for Q3, Q4, Q1, have come down very, very modestly. But I think the real takeaway here is we're not talking about prices falling. You don't see any negative numbers up here. And at the end of the day, we're talking about the rate of price increases, moderating to a more acceptable level for market participants.

Phil: Right, these are all positive numbers, no negative numbers here. And there's still going to be inflation as we move forward. So if we flip ahead, what does that mean for monetary policy for the Federal Reserve? And a question we've received in recent days is if the Fed did what we expected them to do last week, which is raise rates by 3/4 of a point, why did the stock market sell off so hard? Why did the fixed-income market react? And the real answer is what the Fed communicated in terms of their expectations. So on a quarterly basis, they release estimates—everything from inflation, the path of the Federal Funds Rate, growth, unemployment, et cetera. What we're showing here is the Federal Funds Rate. So the charcoal line is the path of the Federal Funds Rate in recent years. You can see the very vertical move up. We have had a very rapid rise in the Fed Funds Rate. Compare that to the last cycle, which looks like a stair step. And then we're showing the projections from the Fed. So their projections as of June, or is the gold line here, you can see higher rates, but not shockingly higher. In the September projection, what they released last week, the green line, we saw a major shift up. So what's the Fed saying? They're saying the FOMC is saying we are going to be more aggressive. Inflation is sticky, we're going to be more aggressive than even we were saying a few months ago. Not to mention they said we expect unemployment to rise and GDP growth to fall versus our June expectations. So—

Brent: Yeah.

Phil: Slower growth, higher rates, higher unemployment, risk assets sell off.

Brent: And I think the hawkish resolve that we saw in those projections, especially when you look at, sort of, that turquoise line, is the extent to which the Fed is going to keep rates higher for a much longer period than many market participants believed. So it's going to be interesting to see that inflection point.

Phil: The concept of the Fed pivot went—

Brent: Absolutely, completely gone.

Phil: Went out the window. So let's flip ahead in terms of reasons that inflation might moderate. Again, it's not moderating the pace any of us want, but why might it moderate? We want to cover a few data points here. So first, retail gasoline prices—something that we all are extremely aware of. They have fallen pretty materially in recent weeks. Now, the problem of retail gas prices—they're very volatile. If you just were to take a straight line from the 2008 peak to the recent 2022 peak, it's only 1.4% annualized inflation.

Brent: Right.

Phil: Right. The problem is, that's not our experience. Our experience is the gas prices fall, they may stay low for years and then they rise very rapidly—very difficult for consumers and businesses to budget. But nonetheless, this number has come down. If you look at crude oil prices, very reasonably this could continue to fall. This is a good thing on the inflation front. More good news on the next slide—supply chain pressures. We've talked about supply chains really since, what, late 2020?

Brent: Exactly.

Phil: All of last year and well into this year. On the left side, this is a Fed survey—or really Fed index—on global supply chain pressure. So higher here means more supply chain pressure. They're studying everything from transportation costs, delivery times, backlogs of orders. And what you see is the huge amount of pressure we saw earlier this year, right. We really, really peaked, and it's come down pretty materially now. There's still pressure in the supply chain system, but it has improved. And on the right side, this is the composite container freight rate for shipping, right. That has come down a lot. So this is one of the variables in the left side, but wanted to show a real-world example of how costs are coming down. Just last week I was at a housewares conference, and what we were hearing from their retail partners is the retailers went very quickly from unbelievably tight inventory—virtually no inventory as we all felt when we went shopping—to now excess inventory. And a lot of that has to do with supply chains loosened up. What is that going to mean this holiday season? It's going to mean discounts, right? There's going to be discounting. That is good news on the inflation front. Might be bad news for company margins.

Brent: Right.

Phil: But if you're focused on inflation, that is good news.

Brent: So what you're really saying, Phil, is that you want everyone to go out this holiday season and do their civic duty to support the economy and spend a lot of money this holiday season.

Phil: Your words, Brent. Your words.

Brent: Gotcha. Right.

Phil: Flipping ahead, the labor market, another driver of inflation. We have unbelievably tight labor market, 11 million job openings as we discussed. But we are seeing some evidence of that loosening. One, we talked about companies, hiring freezes, et cetera, but also on the supply of workers side. Participation rate has ticked up recently. Now, labor force participation is nowhere near the pre-pandemic level. Structurally, that's unlikely to get there anytime soon. We could do a whole webinar on the drivers of that.

Brent: Exactly.

Phil: But the fact is, in August, the US civilian labor force grew by 786,000 people.

Brent: A huge move.

Phil: So that is good news when you're thinking about pressures in the labor market and on the inflation front. Another topic we want to cover is housing. Now, housing is slowing. This is no longer speculation. The data is in. We are seeing housing slowing. This is good news potentially on the inflation front. But obviously, there's many people who are exposed to housing. Not good news for them, and there will be pain in certain geographies. So homebuilder sentiment on the left side, I like this index because it's showing what are builders seeing on the ground level. And what they're saying is, we're worried. Higher mortgage rates, low affordability is having an impact.

Brent: Higher input cost. Exactly.

Phil: That’s right, and we're starting to see price drops. On the right side, this is a Redfin Index. This is the percentage of active listings with price drops—went from record lows to an incredible shot higher. We are seeing price reductions. We just recently received the Case-Shiller price index for the 2020 major metro areas around the US that fell month-on-month. Right, so it is happening. Housing market is slowing. Again, we do not see this as a 2008-type meltdown. Why is that? Credit quality, loan to value, inventory. But it is slowing, and then there's always pain when the housing market slows. The idea that the housing market just slows, and this is purely a soft landing is very unlikely. There's going to be pain, but we do not see a 2008-type scenario.

So all of this is feeding into expected inflation rate and expected inflation expectations. This is a consumer survey that the Fed does, and it's some good news if you're the Fed. Whether you're looking at the 1-year or the 3-year, inflation expectations have moderated. Now you can see the incredible shot higher in that 1-year line. Consumers are paying attention, right, and now they're saying, look, I'm seeing discounting. I'm seeing gas prices come down and the numbers are coming down. I would not read so much into the level of these numbers as the direction.

Brent: The direction.

Phil: The direction is what matters. If you're the Fed, this is good news that inflation expectations are moderating on the consumer front.

Brent: Yeah, so let's bring this home, Phil, and let's talk about, you know, what is the risk of entering a recession. And what you can see on the screen is Phil and I have updated the probability for a recession over the next 12 months from 50% up to 60%. You know, why are we doing that? For all the reasons that we just mentioned, right? Inflation is just not moderating at a fast enough rate for both consumers, for market participants and certainly for the Fed that's making policy decisions.

Phil: Right.

Brent: And obviously the Fed's reaction function to this higher inflation and this persistence and stickiness and inflation, right, is going to create an environment where financial conditions continue to tighten and continue to tighten, and it reduces the probability of us being able to see or for them to engineer a soft landing.

So let's transition and let's talk about it from a market perspective. Let's talk about where do markets go from here. Right, so it's certainly, I don't have to tell anybody on this call that we are deeply in an equity bear market. We're down about 22% to 23% year to date. You can see on the chart we've had four bear market rallies, four head fakes along the way. An awful lot of ability, an awful lot of volatility. Year to date, we've seen more than 90% of trading days, Phil, have been plus or -1%. It's one of the highest that we've seen in more than.

Phil: A bumpy ride.

Brent: A bumpy ride, for sure. But what we really wanted to answer on the next slide is the question that we get asked most, which is, Phil, Brent, where is the line in the sand? What is the level that the S&P starts to bottom out? And also, when might that occur? And again, none of us have crystal balls and we can't know for sure. But what we wanted to show you here is historically, over the last decade or so, where were valuation levels of historical support where the market bounced off of those valuation bottoms? And what we're looking at here, those numbers on the graph are PE multiples. And again, the multiple is nothing more than what investors are willing to pay for a dollar of the next 12 months' earnings. That's all it is. And what you can see is over the last decade, the average of all those market bottoms from a valuation perspective is roughly about 15 times. The low level that we saw is about 14 times. So if I take the current next 12-month earnings for the S&P 500—which as of this week is about $231 per share—and if I were to multiply that by the average valuation level—which is 15 times—that puts a level for the S&P 500 at about 3,465. Let's just make the math easy Phil, let's just call that 3,500. If I were to go to the low level that we've seen—which is 14 times, times $231 per share—that gets you about 3,234. Again, let's round it down for simplicity and call that 3,200. So from a historical valuation-implied floor level, you're looking at anywhere between 3,200 to 3,500 for the S&P 500.

Phil: Right, and these are recent support levels. You hear market people use that phrase. Of course, if there is a profound structural recession—think 2008—valuation levels can go lower. But this is support that we see over the past decade.

Brent: Yeah so let's transition and let's talk about fixed income. Again, an awful lot of volatility in fixed-income markets. And when we think about it in the Treasury market, we're now looking at the worst drawdown in treasuries in 100 years. For broad US aggregate bonds, you're talking about the worst drawdown for broad US aggregate bonds since the index started in 1976. Again, lots of volatility. But what I really want you all to focus on is that right column, where we look at current yields, right. Because forward expected returns for fixed income are predominantly a manifestation of current spot yields. So as you run your eyes down that list, you can see where we are. AG bond yielding almost 5%, 4.83%, and let's look at something like US municipal bonds. On a nominal basis, you're looking at 3.95%. If I tax adjust that yield and let's just say 35% tax bracket, you're approaching a 6% tax equivalent yield for municipals. So as painful as it is, forward expected returns for fixed income look way more attractive today than they did 6 months ago or 12 months ago, when we were looking at the 2-year Treasury yield a year ago at about 27 basis points—now you're almost 4.4.

Phil: And on the client side, whether we're talking institutions or individuals, we are seeing far more interest in fixed income simply because you're finally getting yield and clients are taking advantage of that, certainly.

Brent: So before we get into an update on the five reasons that we really think you need to remain invested, I think one of the most important slides we can all remind ourselves on is that it is nearly impossible—if not impossible—to tactically time or consistently time when to get out of markets and when to get back in. And we fully understand, and we talk to an awful lot of clients, when we see bear markets like we're seeing today in the drawdown in equities and also fixed income—which is normally the ballast in portfolios that provide support for risk assets and it not working—it's very easy to say, I'm just going to take a break. I'm going to step out of the market and I'm going to go to cash and just wait until it's safe to swim in the waters again. We want to show you how dangerous, how fundamentally dangerous that could be. So what you're looking at on the graph on the left is the last 20 years, which if you had put $10,000 into the S&P 500 back in 1992, it grew from $10,000 to over $200,000. Phil, that is a 20x your initial investment by just staying invested.

Over this 20-year period, there's roughly 250 trading days in a given year times 20 years. So that's about 5,000 trading days. If you missed only 10 of those, 10 of the best days, of those 5,000, you had less than half of that growth. If you miss 20 of those 5,000 trading days, the best days, you had almost 75% less. Right, so you might be asking yourself, well, Brent, you know, what's the probability of me missing best days? Well, look at the callout box on the top right. 48% of the S&P 500’s best days occurred during a bear market. Another 28% of the best days occurred during the first 2 months after a bear market, when no one knew it was a bull market starting. So putting that together, a full 76% of the S&P 500's best days occurred when you'd never want to be an investor. So what are the chances of you missing the 10, 20 or 30 best days? Pretty high if you step out of market.

Phil: So let's flip ahead. So that is paramount, right, staying in markets.

Brent: Paramount.

Phil: I want to talk about five reasons to remain invested that might be a little more near-term or intermediate term outside of the fact that timing markets are impossible, which is really the most important thing. We did recently write a note on this topic. So flipping ahead to the midterms—a topic on everyone's mind. What do midterm elections tend to mean for markets? Well, on the upper left, as a reminder, we’ve shown this before, but usually leading into a midterm election, that year, the market tends to be pretty bumpy, much like we've seen this year. This year, of course, we've seen more of a drawdown. But you can see before that vertical line, pretty bumpy ride. And markets tend to perform pretty well after you get past the midterm. You get some certainty in the market, you remove the uncertainty of an election. And the lower right, 12-month return following midterm elections have been positive, 100% of occurrences since 1950. Now, small sample size, these sorts of things, you know, obviously can break. But there is something about the market performing well, average of 15.1% 12-month return after that midterm. So it is something to get past, and markets tend to perform pretty well.

So let's talk more about this midterm election. Looking at the House, this is using PredictIt, which is an odds-making platform. Right now, about 75% chance Republicans win the House. So pretty heavy favorites. That's narrowed a bit. You can see on the chart on the left side, but pretty heavy favorite in the Senate. We have seen a flip there. Democrats are now favored, narrower margin in the House, but Democrats are favored over Republicans there. So again, we're talking about split Congress and split executive versus legislative branch. So keep that in mind as we flip to the next slide, which is very important. How do markets perform in different makeups of government? And the truth is, they like divided government, right?

Brent: Right. Hands down.

Phil: So the two best-performing marketplaces are in the green box on the left side here—are the two most likely occurrences of this election. Which Democrat Senate, Republican House, Democratic president or Republican Congress, Democratic president. And why is that? We're a democracy. It takes negotiation if you're going to get something done, right?

Brent: Right.

Phil: And if there's no negotiation, nothing is done. Markets tend to like that. Also, when you just look at the seasonality of elections, there’s something interesting, markets have historically been the strongest in the third year of a new president's term. We broke that into quarters here in the bottom right in the green box, interestingly, fourth quarter, what we're entering in a couple of business days, first quarter and second quarter of the third year tend to be the best quarter. Again, I wouldn't read too too much into this, but there is something about getting past that midterm election that markets tend to perform pretty well.

Brent: Absolutely. So let's talk about the second reason, which is forward returns post sentiment lows. And we covered, I just covered this slide in the economic section., what I want you to really focus on is below that dotted line. What was the 12-month forward return from sentiment lows? And what you can see on all those individual dots underneath of them is the 12-months forward return for the S&P 500 post those sentiment lows. And what you can see is that in 100% of observations, the S&P 500 put up a positive 12-month return off of the sentiment low. The average, Phil, has been 25% from sentiment low bottom, which we bottomed you can see in July of this year, 12 months forward. The worst return that we've seen going all the way back to the 70's is 14.2% in the October 2005 low. So again, history doesn't always repeat, but there's something to be said when you have consumer sentiment coming off the lows, kind of that change in sentiment. And obviously you can see on the top part of this chart, when sentiment is running really high, you actually don't really get as good of returns as you do when you're coming off a sentiment level.

Phil: Right, it makes it nice to see the data. It makes some sense. Usually when individuals are running for the x, it’s a pretty good time to buy. And this is what the data shows. So we turn ahead to reason three for the returns post the end of a hiking cycle. So we're in the middle of a hiking cycle. We're not at the end, so we're looking a little further down the road. But the Fed is pulling hikes into this year. There's reason to believe they're done hiking, maybe first half of next year. Maybe first quarter.

Brent: Yeah.

Phil: So as we approach the end of their hiking cycle, it is interesting, markets first of all tend—much like leading to midterm election—tend not to perform very well leading into that end of the hiking cycle. Why is that? You're in a period like now. That's right. Once you get past that, markets actually tend to perform pretty well. So for our investors who have longer-term horizons, look past the end of a hiking cycle, you start to remove that uncertainty and markets tend to perform a little better.

Brent: Yeah, and we got a flavor of this when we thought the Fed was going to pivot, right? So when we hit a low on June 16 of this year to August 16, we had a 17% move up in the S&P 500 in exactly 2 months, when we thought that the Fed was going to do exactly this, and they were going to pivot in policy.

Phil: The market got a little ahead of itself. That just shows the power of a Fed pivot when that comes.

Brent: That's right.

Phil: So let's talk about how do markets perform in different inflationary environments? So what we're showing here, let's just take the first bar as an example, what's the S&P 500 return in different types of inflation and directionality of inflation? So the first bar on the left here, this is inflation above 4% and rising. That's what we've seen the last 18 months or so. That is not a good period for the stock market.

Brent: Right.

Phil: Right. That makes a lot of sense. Where we believe we are now is the green box, which is we're above 4%, but declining, right. Inflation is coming down. It's not coming down the pace we want, but it has fallen for 2 consecutive months. So we think it trends lower with some volatility, but it does trend lower. In fact, the only period that the market performs better under different inflation environments is the far right here, which is below 1.5% declining, which is very low inflation. So again, it's the directionality of inflation that the market cares more about than the absolute level. So inflation's high. The market knows that, what the market's waiting for is for inflation to come back down.

Brent: Absolutely. So the fourth reason, Phil, we've covered this a lot—and I continue to say that if you're going to tear out one slide from this entire presentation, tape it to your forehead, put it in the wall of your office and remind yourself to it, it's exactly this slide. So what are we actually looking at here? We are looking at every greater-than-10% drawdown post-World War II. Right, think about the varied exogenous and endogenous events that occurred over this period of time. High inflation, low inflation, major global crises, pandemics, et cetera, et cetera. Lots of stuff in here. And the first three columns here basically show you when the start date and the end date of the pain was and how long that lasts. And what you can see is that regardless of how long the pain lasts—whether it was one month or 30 months, 2 and 1/2 years—and I declined, you know, 10%, 15%, 55%, 47%, right, how one year post the bottom, how much of my initial investment did I recover? And what you can see is, no matter how bad it got, no matter how far we fell, no matter how long it took, the percent of recovery of the previous high, average and median, is in excess of 100%, whether I have a recession or not. And even as you run your eye down that very last column and each one of these recession or non-recessions, even when we didn't get more than 100% recovery, which there's only a couple here, right, if I were to extend the time series 6 months longer or 12 months longer, in all those cases you got back more than 100% of your initial value shortly after that period. So what's the moral of the story? It is very hard, folks, to sit here and watch the bear market vacillate. It's hard to see the money go down. But ultimately, once you hit the bottom, markets turn around exceptionally quickly. If you are out of the market and you miss that pivot, you run the risk of permanently impairing your money. So, so, again, we implore you, it's hard. We have to stick with the plan and stick with the investments because you'll be compensated, we believe, at least looking at history.

So let's get to the fifth reason, and we cover this in one of the writeups that we just did recently, which was, you know, what to expect from a return during a recession. But I think more importantly, after the recession is over, what has performance been? And again, what we're looking at here is every recession, post-World War II, again, lots of things behind what caused those recessions. On average and median, those recessions lasted about 10 months. But I think what's critically important is look at the cumulative returns 1, 3, 5 and 10 years post. Look at the average and median cumulative returns—exceptionally high—but even best look at that last gray bar. And look at the percent of positive occurrences. 92% of the time. One year post the recession, you had a positive outcome 100% of the time 3 year, 100% of the time 5 year, 100% of the time 10 year. You had a cumulative return for the S&P 500 post the end of the recession. Again, hard to be in the mix of the volatility, but once it ends, the recovery, 1, 3, 5 and 10 years post, at least historically, has been incredibly robust. So let's bring this home, Phil, and let's talk about our bottom-line views for markets through the end of this year.

Let's start first with consensus, and let's talk about what analysts feel from a next 12-month perspective and that consensus view, that's bottom up. So that's analysts looking at all the individual companies and doing their assessment and then aggregating that all up together. Analysts believe, and it's hard to believe, that over the next 12 months an almost 26% return or 4,727 on the S&P 500 12 months forward. Again, a lot can change, but that's where analysts are at least today. What do we actually believe? So we've brought down our price target from 4,350 down to 3,800. And it was interesting, we got within 45 points of that 4,350 target in August. Little short, we've had a significant pivot like you talked about in policy towards hawkishness for the Fed and in tighter financial conditions. So we brought that target down. What, what underlies that bringdown in target? Well, two things for 2023, and we cover this earlier, analysts are expecting $242 a share. We think that that's going to be a little bit lighter. We actually believe that we're going to see about $237 per share in 2023. So not a cataclysmic fall off the cliff in earnings, but a comedown in expectations. We believe that the PE multiple, or the price that investors are willing to pay for that dollar of earnings, will remain kind of where we are at about 16 times. So 16 times $237 per share gets you to that 3,800 level.

Phil: Yeah, a few things of note. One, 3,800 is higher than where we're trading today, right? To this, at this point, it's basically a 3-month price target, right?

Brent: Right.

Phil: So it's a pretty short term. And then finally, remember everything we just said in terms of long-term investing, right? Whatever the market does the next 3 months, it is about time in the market and that really is what generates excess returns in the long term.

Brent: Yeah so Amy, I can see all the questions piling up on the side of the screen here. So why don't we turn it over to you and why don't we jump into Q&A?

Amy: Yeah, thank you, Brent. Thank you, Phil. If you see me walking into walls, it's because I have a slide taped to my forehead. So, yeah, we do have a number of questions. We also had a number of questions come in on our registration process. If you'd like to ask a question, please use the Q&A or chat feature over on the righthand side of your screen. Brent, the first question, no surprise here. If we were to drift into a recession, how long do you think it would last?

Brent: Okay, yeah. So based on at least history, Amy, I mean, going back post-World War II, the average and median length for a recession has been 10 months. Now in there, there's some very short ones, just like we saw in 2020 and some longer ones like we had in the 60s. Right, but the average in median has been about 10 months, which is not a short period of time, right? But again, what I think investors really need to focus squarely on—at least from an investment perspective, Phil—is the 1-, 3-, 5- and 10-year subsequent returns for the S&P 500. So while it can get noisy now and potentially during a recession, we think investors need to look through the noise of the day and look towards the intermediate or longer term, because changing your posture, stepping out of the market, can be a very perilous thing to do because markets react and change quickly. And if you stay out of the market, you're going to end up missing the recovery.

Amy: Thank you, Brent. Phil, the next question is on the Fed trying to stop inflation. Will we see prices come down this year, and how might that impact the labor market?

Phil: Look, look, it's a great question. If we flip to slide 9. Look, what we're likely to see is the pace of inflation moderates. That does not mean prices come down, economy-wide, right. Now, are things that come down in price? Sure, gasoline prices have come down.

Brent: Yeah.

Phil: There are less sticky parts of the economy that you will see a decline in prices. That does happen, but economy-wide, it's very unlikely you see true negative inflation across the consumer basket. What does this mean for the labor market? Well, really, the labor market is one of the things feeding into inflation.

Brent: That's right.

Phil: Right.

Brent: That's right.

Phil: So, so does the labor market loosen? The Fed is communicating that they want to increase the unemployment rate, and we're seeing participation improve at least in the recent month, which could help wage inflation, right? If wage inflation improves that, of course, can feed into inflation. So the short answer is, it's going to improve, we believe, but really at a slow pace. So just because it's at 5.8% in the first quarter, let's say, that's still painful.

Brent: Yeah, absolutely. And we all have to remember, the Fed said emphatically that they are going to be data dependent. Right?

Phil: Right.

Brent: So, so if God forbid—and I'm knocking on wood as I'm saying it—is if we didn't have a short and shallow recession and we got into something, God forbid, that was deeper and protracted, right, and we do have a full-blown recession, unemployment rate increases, prices will inevitably come down. It's happened almost every time we have a deep and protracted recession. So again, it sounds like a not great answer, but we kind of have to just wait and see what it actually looks like.

Amy: And in that same vein, Brent, we just had this question come in on the chat with projections for higher interest rates, how might that impact emerging markets, international equities and bonds?

Brent: Yeah, I think that that's a great question. I think and I hope everyone knows this, that inflation is not just a US thing. We are seeing inflation be an incredible global issue. I mean, look at what's going on in the UK, look what's going on in the Eurozone, even in Japan, where they've had deflation for, for years. Right, so across the globe, we're seeing inflation being a problem. Certainly in emerging markets, they are probably more expert in dealing with higher degrees of inflation, as you would expect in emerging nations. They tend to combat variability and growth, variability and inflation rates. But at the end of the day, I think it all depends on global policy and specifically policy from foreign central banks. And certainly when we think about how that might affect their economies, right, if they become more contractionary in their monetary policy to control those levels of inflation, right, it does also affect, you know, exports and imports.

Phil: Their currency.

Brent: Currency, right. So the thing is that we've seen the dollar being incredibly strong versus developed and emerging baskets. If I'm thinking about emerging markets, they're predominantly export-driven economies. So at least from the standpoint of their currency being weaker relative to the dollar, relative to a Euro's basket, relative to a developed currency basket, it can aid and help their economy. I think there is an awfully long way to go. Valuations have fallen a lot in emerging-market nations. If you're an investor looking 3, 5 years out, 10 years out, it is getting more and more attractive every day. But I think there's a long way to go, Amy.

Amy: And Brent, we talked a little bit about midterms. Can you talk a little bit more about the trajectory of the markets following the midterms and that impact?

Brent: Absolutely, and I think Phil said it really well. The markets love divided government, right? That doesn't stop the rhetoric and the absolute nonsense that we hear every single day. It doesn't get in the way of talking about what foreign policy is and the things that we're hearing on the news as it relates to how we interact with other countries around the world. But at the end of the day, if we focus squarely, right, on the essence of the question, which is, you know, what will midterm elections potentially bring as it relates to markets, again, at least historically post-midterm elections, right, we've seen positive returns for equity markets. Taking that a step further to what you said, Phil, when we think about divided government, the markets love it because it really is just rhetoric. It takes an awful lot to come to the table and reach across the aisle and come to consensus and affect policy when you have divided government. So again, it's going to continue to be noisy. You may or may not like what you hear as it relates to markets, though, divided government has been very good, at least historically, for equity markets.

Phil: That's right.

Amy: Phil, we covered this a little bit, but we didn't, this is a pretty specific question. What is the optimal employment rate to achieve a 2% target inflation?

Phil: Yeah, it's a great question. I think it's something we're all thinking about. In fact, the prior question about labor market wages feeds directly into that. So look, the unemployment rate right now is 3.7%. It ticked up in the most recent month, but that was actually because participation rose so much. The truth is, in the household survey, which drives the unemployment rate, we saw a gain in jobs. So it's not an increase in unemployment rate in the traditional sense. It's about people coming in into the labor force. The answer is higher, likely, I'd say sort of in the 4, 2 to 4 and 1/2 percent unemployment rate, you start to see that really impact inflation. Now, unfortunately, that impacts wage inflation. That is a major factor in inflation. There's a lot of other things happening in the globe that are impacting inflation right now, including geopolitical concerns in Europe and Asia. So there are other factors driving inflation than just US wages, but we do think it moves higher. The Fed is saying they want the unemployment rate to get to 4.4%. Now they aren't using the word want, they're projecting that it gets there. But part of that is by increasing interest rates. So the answer is higher. I think you start to get the unemployment rate closer to, say, 5%. I think we're talking less about inflation and more about growth. That starts to look like a weak labor market, which of course, is going to feed into the US economy. So it is a tightrope. That's why we increased our chances of recession today.

Amy: So Brent, with everything going on, what is a good investment strategy under a high inflation situation and possible recession?

Brent: Ah, great, great question. Financial assets tend across the board not to do well in a high-inflation environment. And in the midst of a recession, broad financial assets tend to struggle broadly. And we've seen that when we looked at the commodity complex, right, you know, looked good in the beginning. And look at price declines in the 37% drop in WTI. Look at what's going on with gold. So a lot of these historically lower or non-correlated assets.

Phil: Inflation havens.

Brent: Inflation havens. I mean even the talk about Bitcoin being an inflation hedge, how's that working out? Not well at all. So at the end of the day, financial assets broadly do not do well in periods of high inflation and a recession. But what I will say is what's important is that it's all about having a, number one, a financial plan. That's the number one set of instructions for any client. You have to have an intermediate to long-term set of guidelines that shepherd how you think about managing your money, but also how do you build your portfolio? We think that investors need to have a globally diversified multi-asset portfolio that thoughtfully looks forward, right? So when we build our portfolios, it's a 3-year forward-looking approach to making sure that we're changing the exposures in your portfolio, modifying those exposures to be reflective of what's coming down the pike. Right, you're never going to have the retrospective predictability to go, hey, I put this in exactly when, because I know that we're going to have either high inflation or recession—that just, that's impossible to predict. But over reasonable periods of time, having a globally diversified multi-asset portfolio coupled with a financial plan, we believe will allow investors to be successful in achieving their goals and objectives and accruing long-term wealth over time.

Amy: So Brent and Phil, thank you both so much for sharing your thoughts and answering questions. We'll go ahead and wrap things up. I want to thank you all for being on the webinar today. If your question wasn't answered, please reach out to your First Citizens partner. Our next market update webinar will be on Wednesday, October 26, at noon eastern, and we'll be sharing details about that webinar along with today's replay. Until then, we'll keep you updated throughout the month with our Making Sense: In Brief series. That's where Phil provides a look at the week ahead every Monday morning on We'll also share updates through our, throughout the month, through our Q&A series and written commentary, all in an effort to keep you well-informed to make your financial decisions. On behalf of all of us here at First Citizens, I want to thank you for trusting us to bring you this information. Your trust in us is something that we never take for granted. We hope you have a great rest of the week, and we look forward to seeing you on our next webinar.

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First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA/SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA/SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

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What's next for interest rates?

We're getting questions from clients regarding the latest 0.75% rate hike from the Federal Reserve (PDF). The hike was not a surprise, yet markets sold off following the announcement. Why is that?

The latest report from the Federal Open Market Committee, or FOMC, included their quarterly projections, which signaled monetary policy would remain aggressive. Compared to June's projections, the Fed's forecast puts the federal funds rate above 4% at year end and even higher in 2024. Inflation has fallen at a much slower pace than expected, driving aggressive monetary policy from the Federal Reserve. Year-over-year inflation was 8.3% in August—an improvement compared to July, but higher than expected.

Timing markets can prove costly

Investors don't need anyone to tell them that 2022 has seen a lot of market swings. During this month's webinar, we discussed five reasons to remain invested despite volatility (PDF). But the truth is, there are many reasons to stay invested and avoid timing markets. For example, if a $10,000 investment in the S&P 500 in 1992 stayed fully invested every day until 2021, the value would have grown to more than $200,000 simply by the investor doing absolutely nothing. If the investor missed even just the market's 10 best days, the market value would have decreased by 54%.

Bottom line for markets

  • Wall Street consensus S&P 500 12-month forward price target is 4,727, or 25.7% return from close on September 22's close of 3,758 (Ned Davis, Bloomberg).
  • Our year-end 2022 S&P 500 price target is 3,800, equating to around 20% decline from 2021.

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Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA and SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

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