Another Rocky Month
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.
Equities Stumble
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.
These moves occurred mainly 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.
Treasury Yields Rise
Short-term treasury yields continued climbing on expectations of additional interest rate bumps, with 2-year notes, particularly, seeing an uptick throughout 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 individuals and businesses, which can slow 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.
Recession Watch
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 and on the Fed’s accelerated unwinding of its $9 trillion balance sheet. Inflation, employment, and quantitative tightening 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 to bring inflation down to the Fed’s target of 2%. If the Fed gets its wish, look for unemployment levels to increase through the second half of 2022 and into 2023.
Are you interested in discussing the month’s market movements? Don’t hesitate to reach out via phone or email.
Actions Steps Taken this Month:
Added JPST for many investors
JPST is an ultra short-term bond fund that has held up exceptionally well and pays roughly a 2.6% yield (as of 08/22). Good cash replacement.
I am nibbling back into stocks, and I have focused more on the S&P 500 and large cap values as places to put some cash to work.
All market data sourced from Wall Street Journal
Best Regards,
Arthur Strauss, CFP®
President & CEO
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