We are coming to the end of the third quarter and summer is looking like it will close on a sour note. Equities have given up all their gains off the mid-June lows as stocks have now fallen in five of the last six weeks. The key drivers of this decline are rising interest rates and slowing economic growth.
The monetary tightening of the central bank has taken the fed funds rate up 225 basis points in quick order. Among other things, the Fed's actions have pushed the average 30-year mortgage rate up past the 6% mark, which has substantially cooled housing activity and hurt a key engine of the domestic economy. Harder times lie ahead for the housing market.
I wish I could be sanguine about the economic direction of the country. However, all signs point to the Federal Reserve triggering an economic contraction to get inflation back under control.
This effort comes after the central bank missed the chance to arrest surging prices with interest rate hikes in the second half of last year when economic growth was much stronger. The latest canary in the coal mine comes courtesy of FedEx Corp. (FDX) , which has seen its shares nearly cut in half from their year-to-date highs. The last three times the shares had a 50% drawdown occurred during the recessions of 1991-1992 and 2008-2009 and the pandemic lockdowns.
Nothing much is working right now in this market. Not even the vaunted FAANG stocks are resisting the headwinds of this negative market environment in 2022. I don't see any relief for investors on the short-term horizon. Given this outlook, I continue to be in a defensive posture with my own portfolio, a quarter of which is allocated to cash at the moment.
I continue to act upon the limited opportunities I do find in the market, mostly via covered call strategies like the one I highlighted around Spero Therapeutics (SPRO) this weekend. Defensive health care concerns such as Merck (MRK) and Gilead Sciences (GILD) have the largest weighting in my portfolio. Consumers will continue to cut back on discretionary items such as going out to restaurants. However, demand for medications, treatments and chemotherapy tends to be quite inelastic. Both stocks are cheap on an earnings basis and provide solid dividend yields as well.
It's hardly an aggressive investment strategy as we head into the fourth quarter, but given things will likely get worse before they get better, it's a prudent one.