• We do not believe we are witnessing the start of a new equity bear market. Current conditions look like a typical bull market correction.

• Interest rates and inflation are moving higher, however. While this presents more risks, we do not think they are yet rising to the point that economic growth would suffer.

• Volatility may remain elevated in the near term, but we believe stock prices should rise and equities will outperform bonds over the coming year.

By any measure, stock markets have had a rough time of late. The S&P 500 Index fell 4.1 percent last week, capping off its first three-week downturn since 2016.1The index also experienced its first 1 percent+ drawdown since June and the first seven-day decline since the January/February correction.1 With all eyes on the market, we’d like to focus this week on three key questions: What were the main causes of last week’s selloff, what has changed (and what hasn’t) and what can investors expect from here?

Three Principal Causes Of Last Week’s Selloff

1. Uncertainty over Federal Reserve policy: Earlier this month, Fed Chairman Powell said Fed policy was “far from neutral” and indicated the central bank may choose to move past neutral as it raises rates. Fears of interest rates rising too far and too fast (combined with climbing bond yields) unnerved investors who feared that corporate borrowing costs would be rising.

2. Worries over corporate earnings: All indications are that third quarter earnings results should be strong, but are unlikely to match the lofty results from the first half of the year. This has caused some to focus on the negatives and worry about “peak earnings” being in the rearview mirror. At the same time, corporate guidance has been pointing to such issues as high labor and freight costs, as well as climbing raw materials and commodity prices.

3. Technical factors that exacerbated the selling: Similar to what occurred earlier this year in January and February, programmatic and quantitative trading, as well as forced selling from leveraged funds and investors, appear to have accelerated the pace and magnitude of the declines.

What Changed Recently? And What Hasn’t?

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