Amada Agati:  

When I hear the term "proceed carefully" this time of year, it's usually because I'm at a haunted house with my kids. But investors heard Chair Powell mention the words "careful" or "carefully," 16 times in the latest Fed press conference.

In this month's education of Adding Alpha, we guide investors through the latest Fed meeting takeaways and share our thoughts on the implications for portfolio positioning into yearend.

Compared to recent history, the September Fed meeting was somewhat rare in that markets assumed no rate hike would occur and that's exactly what markets got. It was the second time the Fed paused interest rate increases since their policy pivot back in March of 2022.

However, the big unknown was what the Fed would ultimately do or say with respect to updating its forward guidance in the infamous dot plot, which depicts Fed members collective projections on where the path for interest rates should go from here.

Would it show that Fed members are in favor of imminent rate cuts as the markets have been hoping for so long now? Or would it show we've arrived at our final destination for monetary policy tightening and there would be no more rate hikes? Or, might they leave the door open for still more rate hikes from here?

As the revised dot plot shows, the outlook for 2023 was unchanged from the June meeting, but the projections show a higher terminal rate for monetary policy in 2024 and beyond.

Partially supported by an upward revision to the Fed's outlook for the economy. In other words, markets got a hawkish pause. While the Fed may have taken a pause in September, the door is still very much open for more rate hikes. But the door is also still very much open for less rate cuts than the market expects. Markets and the Fed are just not on the same page.

There's been a lot of victory flag waving lately that the Fed pulled off mission impossible and brought inflation under control without driving the economy into a recession.

We think those views are way premature.

While inflation is certainly much lower than it was this time last year, we're already seeing evidence of price pressures creeping back up and higher gasoline prices are only going to push inflation higher.

So we're still in a longer for longer Fed dynamic.

A higher terminal rate than what the market expects, and a longer overall tightening cycle.

Fed's just not out of the driver's seat yet.

As higher interest rates begin to wear on consumers and businesses, we still expect a mild recession, aka a soft landing scenario, to occur in early 2024 and that equates to approximately a one to two percent decline in GDP growth and an approximate 10 percent decline in S&P 500 earnings growth.

Markets reacted fairly negatively to Powell's comments about proceeding carefully, which aligns with our concerns for the path forward.

What are the positive catalysts to keep the market rally fueled at these stretch valuation levels?

We're struggling to find the positives, while the list of negatives is beginning to grow.

The UAW strike, a possibly U.S. Government shutdown, resumption of student loan payments, higher long-term interest rates, and the rapid rise in energy prices lately, give the markets plenty of reasons to take a pause here.

As a result, we're continuing to play defense in this environment.

We'll we continue to lean into safer haven quality exposures in both equities and fixed income, we've recently taken further steps to de-risk, incorporating quality dividend growth and minimum volatility factor exposures to help create ballast in portfolios as the slow march towards recession continues  and volatility appears poised to make a resurgence.

Investors should proceed carefully.