S&P 500 remains 17% above year-end 2019 levels, but this year's selloff doesn't feel as bad as expected

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S&P 500 remains 17% above year-end 2019 levels, but this year's selloff doesn't feel as bad as expected

The S&P 500 remains about 17.1% above the year-end 2019 levels, according to Dow Jones Market Data, although this year's selloff might feel brutal, especially after the September carnage.

That isn't low enough, given the likely scope of Federal Reserve actions needed to bring surging inflation back to the central bank's 2% annual target, according to Steven Blitz, chief U.S. economist at TS Lombard.

Markets are being routed but they are resetting due to too rich price levels created by Fed policies that went on way too long, Blitz said in a recent client note.

Financial conditions are consequently tightening, but are not yet enough to meet.

The economy is about to blow a gasket. Blitz pointed out how little financial conditions have tightened see chart relative to past recessions, bolstering his case for why the Fed still needs to raise its policy rate by more than anticipated.

U.S. stocks ended Wednesday in choppy trade after rallying sharply to kick off October and after their worst September since 2002. After a rough September, the S&P 500 s SPX, typically sees modest gains a month later, but not the Dow Jones Industrial Average, DJIA, when looking at historical data, William Watts wrote.

The main problem for Blitz is that this year's stock-market decline has been hardly a shake out when considering the roughly 50% drop in equities in the 1974 -- 75 recession and 2008 -- 09.

The market has gotten here by pricing in the Fed's 4.5% solution for 4.5% inflation, 4.5% unemployment and 4.5% funds rate with all believing this is the case.

Blitz said that it would be enough to put maximum downward pressure on inflation. The jobs report for September gave investors clues as to whether the Fed might keep up its pace of outsize rate hikes in the face of robust wage gains that have fuelled inflation.

Related: Hiring and job creation fell to a 2 year low in the September jobs report of the U.S.

The Fed solution may need to hit 5.5%, especially with household balance sheets resilient, even as interest rates have risen, which has cooled the housing market as the 30 year fixed mortgage rate nears 7%, according to Blitz.

Energy costs as a component of inflation came back into focus on Wednesday after major oil producers agreed to reduce their crude production levels by 2 million barrels a day, starting next month.

The decision was followed by the US benchmark West Texas Intermediate crude for November delivery CLX 22, CL 00, which gained 1.4% at $87.76 a barrel.

U.S. crude prices have fallen from an intraday high in March of $130 a barrel, according to FactSet data, after they surged as global economies first emerged from the Pandemic lock-downs, but also as Russia's war in Ukraine.

There is still a lot of room for housing in a recession, even if prices drop 15%.