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Sound Advice: October 19, 2022

Dead Cat Bounce?

One of the most common occurrences during times of market weakness is what’s known as a dead cat bounce.  A dead cat bounce is a short-term, often only one day, rally of considerable proportion.  These days, that kind of jump would probably be in the range of at least 500 to 1000 points in the Dow Jones Industrial Average.  It would be tempting to think that these interim rebounds are indicative of more to come, but almost always they are nothing more than temporary relief from a lengthy plunge in the leading indexes.

It would be naïve to think that they signal a continuing change in the direction of the market.

Current economic prospects are not encouraging.  The Fed has already increased the federal funds rate from essentially zero to 3.25%, thanks to a trio of 0.75% jumps, and indications are that there is more to come.  Indeed, one might well expect to see this key indicator near 4.50% before the program of tightening ends next year.  This is the Fed’s primary tool in dampening the economy and getting rampant inflation under control.

Although the central bank’s goal is a soft landing in which business slows temporarily, the history of these efforts suggests that economic conditions will get much worse and extend, perhaps intensify, the recession that has been under way so far this year.  To date, the labor market remains strong, though one has to wonder how this strength may persist when overall conditions finally react to the Fed’s credit crunch.

However severe the impact of higher interest rates, they will eventually flatten and then ease.  By that time, yields on fixed-income investments will be of more interest and subsequent easing will provide the potential for principal appreciation as well as current income.

We are not there yet and may not be for a number of months.  As before, the investment markets look ahead, sometimes far ahead.  In the past, the September-October time frame has often been a period when weak markets changed direction.  We could be seeing that now, but it would be best to tiptoe in to take advantage of lower prices and add in increments over the next few quarters. 

N. Russell Wayne, CFPÒ

www.soundasset.com

Any questions?  Please contact me at nrwayne@soundasset.com

Sound Asset Management Inc.

Weston, CT  06883

 203-222-9370

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