September Economic Update
Renewed fears of higher interest rates and economic weakening, coupled with tough talk by the Federal Reserve, weighed on stock prices in August. The Dow Jones Industrial Average moved lower by 4.06%, the S&P 500 retreated 4.24%, and the Nasdaq 100 Composite fell 4.64%. (1)
Coming off of the heels of the July kick-back rally, August began the month on a high note as investor optimism gained steam. This was aided by a better-than-expected Consumer Price Index (CPI) report that noted inflation decelerated slightly from 9.1% year-over-year down to 8.5%. While CPI has remained elevated near 40-year highs, the small drop gave hope that the worst might be behind us on the inflation front. (2)
The small CPI drop fueled misguided speculation the Federal Reserve may begin to ease the pace and magnitude of interest rate increases, despite the Fed repeatedly stating they are seeking several consecutive months of substantial declines with inflation.
In response to these speculations, Federal Reserve Chair Jerome Powell’s much-anticipated speech at the Jackson Hole Economic Symposium rattled investors. Powell’s comments did not include any changes to their current policy or forward guidance, but the blunt forcefulness, tone, and delivery of the speech was intended to leave no room for any further misinterpretations with the Fed’s commitment to lowering inflation and aggressively raising interest rates. The market’s month-to-date gains were given back following the speech as Powell ended any investor hope of a pivot to current monetary policy.
While August was a small step backwards, the major market indices continue to trade above the prior lows set back in June of this year. The small decline with inflation was a small glimmer of hope that the grip of inflation might be starting to ease. The largest contributor to inflation is the price of oil which has dropped sharply for several consecutive months, which increases the probability that we will see another CPI decline which will be reported next week. If inflation continues to decline, it would be likely that the Federal Reserve would eventually stop raising interest rates sometime in early 2023. All of this is yet to be seen and it is too early to make any conclusive projections.
Most measures for stock valuations on the S&P 500 remain around historical norms based on corporate earnings, risk premia, interest rates, and discounted cash flows. Next quarter’s earnings season, which will begin in October, will be an important factor for stock valuations. While we did see a drop with corporate earnings last quarter, it was not as bad as most analysts expected. However, after several more months of inflationary pressures and rising interest rates, there is some concern the next round of earnings reports won’t be positive. Pending any unknown variables, this will likely be the largest contributing factor for the markets moving into the latter part of this year.
It is difficult to project when the end of this current economic and monetary cycle will conclude, but we are likely closer to the 7th inning rather than the 4th inning. As each new data point filters in, we will continue to sharpen our outlook for when the new market cycle and pivot will likely begin.
Monthly Financial Tip:
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1. WSJ.com, August 31, 2022
2. CNBC.com, August 10, 2022
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.