The stock market took a step back in August, and bond yields surged, as the Federal Reserve (Fed) vowed to keep raising rates. But, on the bright side, oil and gasoline prices continued to fall, while employment remained solid.
Consumer spending also seemed to be moderating, with personal income and expenditures inching up modestly, according to the Bureau of Economic Analysis report issued August 26. Personal income and disposable personal income both rose 0.2% from the previous month in July, while personal consumption expenditures edged up just 0.1%.
Reflecting some progress on the inflation front, the Personal Consumption Expenditure price index decreased 0.1% in July, while prices for goods declined 0.4%, and prices for services increased 0.1%.
The manufacturing sector recorded its 27th consecutive month of growth in August, although that growth has slowed in recent months, according to the Institute for Supply Management (ISM) September 1 report. Ten of 18 sectors tracked by ISM reported growth in manufacturing activity in August while seven reported a contraction in activity. The report also noted that lead times for purchases improved in August, price increase growth trended lower for the second straight month, and supply delivery performance improved for the fourth consecutive month.
Outlook: Volatility in the stock and bond markets is expected to continue as the Fed pursues its monetary tightening policy in an effort to tamp down inflation.
The aggressive policy may lead to additional weaknesses across the economy. The Fed is expected to continue to raise rates over the next few months, which could trigger “pain” for the economy.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation,” said Fed Chair Jerome Powell in an August 26 speech, “they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
However, wage demands and a tight labor market will make it more difficult for the Fed to get inflation in check.
Commodities prices are coming off the boil but remain elevated. International risks are still quite elevated, as European and Asian markets continue to struggle with a variety of issues, including the economic impact of the war in Ukraine.
Earnings season was mildly better than anticipated, but margin pressures will continue due to wage and productivity challenges. The housing market has already seen a drop-off in new mortgage applications and housing starts in recent months, which may continue in the months ahead as mortgage rates climb.
Stock market valuations, which reached a relatively high level at the peak of the market, have fallen to a more reasonable level as stock prices have declined. For long-term investors, falling stock prices could be seen as an opportunity to take advantage of lower prices. Bond market investors may also have one of the best buying opportunities in years at current interest rate levels, with yields now in the 4% to 8% range (depending on quality and term to maturity).
U.S. stocks drop
The S&P 500 Index dropped 4.24% in August, from 4,130.29 at the end of July to 3,995.00 at the August close. The total return of the S&P 500, including dividends, was a negative 4.08% for the month. Year to date, the total return was a negative 16.14%. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index also dropped in August, down 4.64% for the month, from 12,390.69 at the end of July to 11,816.20 at the August close. Year to date, the NASDAQ is down 24.47%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)