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Markets adjust to hawkish reality, fear grips housing market and Covid not over. Markets are adjusting to the new, more hawkish reality afte [View in browser]( [Bloomberg]( Markets adjust to hawkish reality, fear grips housing market and Covid not over. Hawkish reality Markets are adjusting to the new, more hawkish reality after the Federal Reserve raised rates 75 basis points this week and lifted projections for where the base rate will be this year and next year. Goldman Sachs [has cut]( its year-end target for the S&P 500 to 3,600 from 4,300, citing higher interest rates. The forecast is skewed to the downside because of rising odds of a recession. The Fed's hardening fight against inflation has affected all assets, with [investors asking](, why buy now when things could get cheaper still? Such an intense pace of tightening may be [hard to escape](. Nations are being forced to [go it alone]( in erecting defenses against the dollar’s relentless strength. Housing slump The [US housing market]( has gone from fear of missing out to just plain fear. Prices are falling from peak levels, with expensive West Coast markets recording the steepest declines. Bidding wars are fading and sellers are having to ratchet down expectations. [Mortgage rates]( rose for a fifth straight week, threatening to freeze more would-be buyers out of the market. The average for a 30-year fixed loan surged to 6.29% from 6.02% last week. Covid not over The World Health Organization said the world isn’t at the end[of the Covid pandemic](, just days after President Joe Biden declared it’s over in the US. Hong Kong [scrapped hotel quarantine](for inbound travelers in the most substantial move yet to end its isolation, and signaled more easing is likely to come. Japan will abolish a slew of[Covid border controls]( from Oct. 11, Prime Minister Fumio Kishida said, in a move that looks set to revive the tourism industry. Futures decline US equity futures [extended declines](at the end of a week that underscored expectations for tighter monetary policy. S&P 500 contracts fell 0.8% as of 6 a.m. New York time while the Stoxx 600 was set to enter a bear market. A dollar gauge rose to yet another record as 10-year Treasury yields held near the highest in a decade. UK [bond yields surged]( and the pound fell as Chancellor of the Exchequer Kwasi Kwarteng unveiled the country’s economic growth plan and the Debt Office announced it would sell more gilts than planned. Coming up... Markets will focus on Chair Jerome Powell’s opening remarks at a Fed Listens event at 2 p.m. after the central bank gave the clearest signal yet that it’s willing to tolerate a recession as the necessary trade-off for regaining control of inflation. US data include S&P Global services and manufacturing PMI after private-sector activity[in the euro zone]( contracted for a third month. What we've been reading Here's what caught our eye over the past 24 hours. - Apple Music [scores a touchdown](. - Follow the money to [Singapore](. - Life is tough in the world's [strictest Covid Zero city](. - [Cash is king](, Bank of America says. - Credit Suisse shares hit [record low.]( - How to solve inflation? [Try immigration](, Bill Ackman says. - YouTube is coming for [TikTok's biggest stars](. And finally, here’s what Tatiana’s interested in this morning Bond yields are the most attractive relative to stocks' earnings yields in at least a decade, a blow to the "no alternative" mantra that dominated markets for much of the last decade. But before that, it used to be the norm, and whether bonds will beat stocks largely depends on your view on where the economy is headed. Different iterations of the so-called Fed model, which compares bond yields to stocks’ earnings yields, show equities are least appealing relative to both corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is getting attention among investors, who can now look to other markets for similar or better returns. That's seen as a threat to stocks.  But this model has a mixed track record. Going back to 1990, whenever the spread between the average investment-grade bond yield and the S&P forward earnings yield was narrower than today's level, total equity returns outperformed on an annual basis more than half of the time. The ratio is better when compared against Treasury yields. Results don't significantly change when looking at the times when the gap turns positive. A notable pattern, however, is that equities tended to underperform during economic downturns. When the yield spread was narrower than today, S&P returns lagged corporate bonds in the first year of the three recessions (1990, 2001, 2008) captured by this study, and in two instances when compared with Treasuries (the yield gap was wider in 2008). Of course, caveats apply, mainly that inflation wasn't running as fast during the period analyzed in this study. So a look at the Great Inflation period is warranted; however, that can only be done on a current-yield basis for the S&P. During the early 1980s, the last time price growth was running as hot as today, stocks surprisingly beat bonds even amid a recession but then lagged for the following two years and didn't start consistently outperforming until 1985 as inflation and rates came down materially. Of course, earnings estimates remain a big question and weekly downgrades have outpaced upgrades since June, according to a Citi index. FedEx's recent profit warning is alarming. Some of the concern is already reflected in the price but a lot of it isn't, analysts from Goldman to Morgan Stanley say. That said, hiding in bonds hasn't always been the winning strategy even as yields surge on central bank tightening. Only if you think we're headed for a downturn soon. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. You received this message because you are subscribed to Bloomberg's Five Things - Americas newsletter. If a friend forwarded you this message, [sign up here]( to get it in your inbox. [Unsubscribe]( [Bloomberg.com]( [Contact Us]( Bloomberg L.P. 731 Lexington Avenue, New York, NY 10022 [Ads Powered By Liveintent]( [Ad Choices](