The hawkish shift depicted by the Fed’s most recent summary of economic projections, along with labor unrest and political uncertainty, have served to elevate anxiety among investors and push the equity market into a tactically oversold condition.

The rapid uptick in longer-term rates represents an additional source of concern, as the relationship to the shorter end of the yield curve has changed.

While much is riding on the tenor and tone of company reporting for Q3, the developing oversold condition, as well as improving seasonality, have enhanced the prospects for a bullish rebuttal to recent pessimism.

Our allocations maintain a small equity overweight and a bias toward adding to that weight, given further weakness.

Fixed income credit spreads were little changed in the third quarter. Through the rest of the year, we expect credit markets to be increasingly driven by concerns over a slowing economy, tightening financial conditions and the lagged impact of higher interest rates, including the Federal Reserve holding rates higher for longer.

Both investment-grade and high-yield corporate bond credit spreads are below their long-term median and average.

Defaults already have started rising, particularly for leveraged loans, where credit quality has deteriorated. We expect defaults to continue to rise but remain below prior recessionary peaks.