While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. Jerome Powell - 8/26/22 Jackson Hole Symposium
Last week's market recap:
- The S&P 500 was down -4.02% for the week. Year-to-date the index is down -14.00%.
- Large-Cap Value leads performance YTD at -7.80%
- NASDAQ closed the week down -4.43% and is down -21.99% YTD.
- 10-Year Treasury Rate increased, ending the week at 3.04% from 2.98% the prior week.
- Fed Funds Target rate is 2.50%
- The 1-Year Treasury is yielding 3.41%
- A 6 Month Treasury is yielding 3.31%
- What is the rate on your savings account?
The week ahead, 8/29:
- Unemployment rate and JOLTS
- Manufacturing data
- Corporate earnings season winding down
It feels like the market is playing the children's game “Red Light, Green Light” with the Fed. Equity markets were running up too fast, and Jerome Powell sent them back. Equity markets took a dive on Friday after Jay Powell made it clear… No Pivot! With inflation near 40 year highs, this shouldn’t be a big surprise. The S&P 500 was up almost 18% mid-June to mid-August. The Nasdaq was up almost 24% during the same time period. The Ark Innovation ETF was up over 42% during the same time period, and even meme stocks were making a comeback. That’s inflationary! We need markets to remain cool to get inflation under control. The Fed wants price stability. It doesn’t feel good when you see massive sell offs in short periods of time, but the market is reacting to a potentially higher Terminal Rate. That makes sense.
Silver lining: Short Term Treasuries yields are more attractive. Many bond funds held up well. Meaning a traditional 60/40 portfolio did its job. The markets are starting to react the way they should because bond yields are no longer zero. This is good news! We need inflation to cool off, especially in the housing market. Some data is already starting to show a cooling in the housing market. So maybe the Fed pausing (Green Light) isn’t too far away, but just like the game, proceed with caution. Markets are expecting September to have another 50-75bp interest rate hike. Markets may remain choppy. Bad news may remain Good news. Slower economic growth implies lower rates.
Below is a chart from J.P. Morgan:
Below is a chart from Redfin. For equity markets, this chart is "Bad news is good news."
To discuss in more detail, feel free to reach out to us.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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