Yesterday’s CPI report came in hotter than expected. There had been a general sense that inflation was peaking and that, while it remained high, we were starting to see signs of a sustained downtrend. But the latest report showed that the end of the tunnel is still too far away to see any real light.

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam! Let’s take a closer look.

When you look at expectations for corporate earnings for the third quarter, you get a bunch of mixed messages. On one hand, the economy is (supposedly) sinking fast, hit by rate hikes and inflation. More, companies are struggling with the labor shortage, with wages rising sharply and, in many cases, labor simply not available. Between a slower economy and a labor shortage—not to mention the problems created by the strong dollar—you would expect earnings to take a sharp hit. Indeed, we have seen a number of downward revisions to analyst expectations. On the other hand, despite the lower expectations, earnings are in fact still expected to grow, which doesn’t seem consistent with the narrative at the economic level. What’s going on?

An already weak third quarter was capped by a sharp September drop in markets. The S&P 500 lost 9.21 percent for the month and 4.88 percent for the quarter; the Dow Jones Industrial Average dropped 8.76 percent for the month and 6.17 percent for the quarter; and the Nasdaq Composite fell 10.44 percent for the month and 3.91 percent for the quarter. Markets resumed their downward trend in August and September after a bounce early in the quarter. Internationally, we saw the same behavior, with both developed and emerging markets down sharply in September and for the quarter. So, let’s take a look back at what drove these declines and then evaluate what it means going forward.

The latest jobs market headlines have been discouraging. One notable fact is that the number of jobs available declined by the largest amount on record, by almost 1 million, in one month. That generated a lot of hand-wringing. Another sign of potential weakness was the recent ADP employment report, which came in yesterday at 208,000, below the recent official number. So, is the job market really getting that weak?

September was a bad month for markets, which were down between 8 percent and 12 percent for the month both here and abroad. The decline was driven by interest rates, which rose sharply. Despite the market pullback, there was some positive data for the last quarter. Job growth was down but remained strong by historical standards, and both major measures of consumer confidence rose.

A few things have happened in the past couple of days. But most people are focused on the stock market, which dropped sharply, bounced, and then pulled back again. As a result, there have been a number of headlines about how the bear market is back, and so forth. For the average investor, this kind of volatility is worrisome. How bad can it get?

One of the top headlines on the New York Times website is about how Congress is working to pass a bill to avert a government shutdown later this week, postponing it until after the midterms. Sounds like an important story! Yet when I look at both the Wall Street Journal and the Washington Post, there is nothing to be seen. Strange, that!

We are now in another downswing in the ongoing bear market. Using the S&P 500 as a measure, as I write this the markets are down 22 percent from the peak at the end of last year and just under 14 percent from the end of the most recent rally in August. This year, there have been four drops and three rallies—and we are down quite a bit. That doesn’t feel good. But, feel good or not, here we are. So, the real question is: what should we do about it? To figure that out, we need to look at two things.

The other day, I wrote a post about how, with expectations very hawkish for the Fed, the thing to watch for in the latest Fed meeting was whether Chair Jay Powell managed to sneak in some hidden dovishness. He could have said, for example, that the Fed remains data dependent, suggesting that it would ease if the data improved. He could have said, for instance, that there were signs that inflation is moderating. He could have said a lot of things.