WHERE WE WERE
August was characterized by the conflict between Fed rhetoric and the prevailing market narrative, as investor sentiment swung from cautious optimism to anxiousness for an uncertain future.
The market continued its rollercoaster ride, staging a modest rebound over the first few weeks of the month before turning negative again on tightening fiscal policy and worrisome corporate earnings reports. August was capped off by the annual Jackson Hole Economic Symposium, which saw the Fed double down on its hawkish stance and the market respond with further selloffs. As a result, all three major indexes ended the month on a downward slide that should persist into September.
The S&P 500 ultimately finished the month down 3.97%, while the Nasdaq and Dow Jones shed 0.15% and 3.93%, respectively, signaling a definitive end to a summertime stock rally that had seen the S&P 500 regain more than 14.52% of lost ground over the past two-plus months.
WHERE WE ARE GOING
These moves occurred largely on the heels of the much-anticipated Jackson Hole Economic Symposium. In front of his fellow economists and fiscal policymakers, Fed Chairman Powell painted a gloomy picture of the months to come, asserting that the progress that’s been made toward curbing inflation to this point “falls far short” of what they need to see before they can consider loosening policy.
The markets had seemed to be working on the assumption that the Fed would decelerate its interest rate-hiking efforts, but any hopes for a pivot in policy were squashed when Powell reasserted the Fed’s directive to fight inflation at all costs. He acknowledged that these aggressive measures “will also bring some pain to households and businesses.” Further selloffs ensued while investors looking to bet against the stock market piled into short positions, reflecting an increasingly negative short-term outlook.
Short-term treasury yields continued climbing on expectations of additional interest rate bumps, with 2-year notes, in particular, seeing an uptick over the course of
August and finishing the month at 3.448%. While these government-backed securities can offer reliable returns to investors in an otherwise volatile market, they’re also used as a reference point for borrowing costs across the market. The result of higher treasury yields is higher, more inhibitive interest rates on loans for both individuals and businesses, which can have the effect of slowing economic growth.
The more the Fed hikes interest rates, the more the economy moves away from the “easy money” policy that businesses enjoyed for over a decade and the closer it moves toward a new, low-growth environment. The Fed will convene again in late September to discuss another rate hike.
ADDITIONAL THOUGHTS
Despite concerns surrounding economic growth and the potential repercussions of persistent rate hikes, fresh data illustrated stronger-than-expected resilience in consumer and labor demand, assuaging some recession fears. Economists and institutional investors will be keeping a close eye on any CPI and employment reports that come out in the coming weeks, as well as on the Fed’s accelerated unwinding of its $9 trillion balance sheet. Inflation, employment, and quantitative tightening are factors that could impact recession projections.
Those hoping for a “soft landing” for the economy were discouraged when Chairman Powell reiterated his intention to keep ramping up rates and tightening policy in order to bring inflation down to the Fed’s target of 2%.
Choosing to view the market from a strictly short-term perspective may cause you to feel uneasy about the current economic outlook. We want to remind you that we are in familiar territory. Our team has maintained a positive long-term perspective since the beginning, and that continues to be true. Investors have often benefited from taking a long-term approach because the market has historically thrived over time.
Remember your plan, and as always, don’t hesitate to reach out.
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