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Market Commentary

The central bank has already raised its benchmark lending rate by three full percentage points so far this year. It is now expected to hit 4.5% by the end of the year. Rate increases take time to work their way through the economy, so the speed at which rates have risen raises the risk the Fed might go too far. At the same time, any sign the Fed might be backing off should be treated with caution—a sudden reversal would probably not be a vote of confidence in the economy’s health.

Notwithstanding the continued rise in consumer prices, the economy shrank during the first six months this year and forward-looking measures of activity suggest the situation hasn’t improved. Some investors have hoped such weakness might persuade the Fed to ease up on its campaign against rising consumer prices, leading to periodic and temporary rallies in stock prices. However, Fed officials have repeatedly quashed these hopes with aggressive commentary on inflation and the future path of rates. The concern now is that the steep rise in borrowing costs this year will push an already weakening economy into recession.

What does that mean for investors? Quality is the order of the day when it comes to both stocks and bonds. For stocks, Schwab recommends taking a sector-neutral approach and focusing on factors such as strong profit margins, high free-cash-flow yield, low volatility, and positive forward earnings revisions. For bonds, that means focusing on Treasuries, certificates of deposit (CDs), and investment-grade municipal and corporate bonds.

In the face of rapidly shifting markets, investors should also consider periodically rebalancing their portfolios to maintain their strategic long-term allocations.

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U.S. stocks: Volatility likely to persist  
Bonds: Conditions tightening  
Global stocks: Earnings Watch  
Trading takeaways: Bearish signals  
What should long-term investors do now?