The Federal Reserve’s (Fed’s) policy to increase the federal funds rate from zero to over 5% has worked to reduce inflation. Inflation peaked at 9.1% in June of 2022. Since then, the Consumer Price Index (CPI) has declined to 4.0% year over year according to the last reading as of May. While higher rates have slowed the economy, the broader economy has not entered a recession, nor does one appear imminent due to the strong job market...

The S&P 500 finished the first quarter up 7.5%. Unlike 2022, large technology-oriented companies led the advance as the median stock appreciated a little more than 1%. The markets started the year strong as expectations for a Federal Reserve rate cut at the end of the year grew.

The markets closed the year down as most asset classes continued to perform poorly. For the year, the S&P 500 declined about 18%. The bond market also closed the year down (the Bloomberg U.S. Aggregate Bond index fell about 13%) as the Federal Reserve (Fed) raised interest rates and reduced its balance sheet (i.e., not reinvesting the proceeds of maturing securities)...

The markets once again had a down quarter. Both the S&P 500 and the Bloomberg Aggregate Bond Index were down almost 5%. This is the same pattern that occurred during the first two quarters. It is a frustrating investment environment, exemplified by the 15% decline in the bond market through September.

Looking back to the Great Financial Crisis of 2007-2009 provides important context for the current market volatility. At that time, the Federal Reserve (Fed) acted aggressively to restore credit throughout the financial system since many of the country’s financial institutions were on the brink of collapse.