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Read the Summer 2022 WAA for our latest Market Review and Outlook

September 2022

Strong start for stocks in August but a rough finish,
as Fed resets market expectations

The second half of the year for stocks got off to a great start in July following a difficult June and first half. That momentum carried on well into August, with stocks posting solid gains across the board, but only until Fed Chair Jerome Powell’s comments at the annual Jackson Hole Economic Symposium August 26. It was a brief 8-minute speech but enough to reset market expectations on the Fed’s future interest hikes and send stocks into a slide to end the month. Not only did the markets give up the early gains, but they also finished in negative territory for the month.  

Following the Fed’s June FOMC meeting, the market appeared too optimistic for a less aggressive Fed given inflation expectations seemed to peak, which led to the big July rally. Despite the 0.60% dip in July CPI to 8.5%, it remained unacceptably high, Fed governors were out reaffirming the Fed’s intentions to get inflation back down to its 2% target. Powell reconfirmed that higher interest rates will slow growth and soften the labor market, which has remained strong, to lower inflation. That needed battle against inflation puts the equity markets at risk as recession fears rise.

The S&P 500 finished August down 4.2% and -17.0% for the year, while the Dow jones Industrials dipped 4.1% to close down 13.3% for the year. The tech-heavy and interest rate sensitive Nasdaq fell 4.6% and slipped back into bear market territory for the year down 24.5%.  Small- and mid-caps fared a bit better losing 2.2% and 3.3%, respectively.

August losses extended overseas as well, as inflation and recession fears rose amid an energy crisis in Europe. The Bank of England and the ECB are also raising interest rates to quell high inflation. The benchmark MSCI EAFE index fell 5.0%, and back into bear market territory down 21.2%. Emerging markets edged higher 0.3% to finish down 19.3% YTD.

Interest rates rose across the yield curve in August. With the 10-year T-note yield at 3.15% and 2-year T-note yield at 3.45%, the 10-2 spread remains inverted since early July and is a notable recession warning sign.

The degree of difficulty continues to rise for the Fed to engineer a soft landing for the economy while reigning in inflation back towards its 2% target. Further, the Fed is reducing its balance sheet from the $8.97 trillion peak that resulted from the historic Covid-19 pandemic Quantitative Easing (QE) response. As part of the reversal process, or Quantitative Tightening (QT), the reduction begins in earnest in September. Unwinding historic measures is bound to be a bumpy process. After Jackson Hole, the market is expecting a 0.75% hike at the Fed’s September 20-21 FOMC meeting, followed by 0.50% in November and 0.25% in December. The key variables will remain inflation readings followed by economic signals. Again, despite the July dip, year-over-year CPI remains high at 8.5%. Further progress with August’s CPI reading, given the persistent dip in oil and gas prices over the past two-plus months, may ease Fed expectations and provide a lift for the markets.

With many moving variables, including inflation, the Fed, and approaching mid-term elections, volatility remains in the forecast. We urge investors to remain steadfast with their investment programs and continue to maintain a long-term focus.


August QuickTakes

  • Stocks surged to begin August, following July’s big gains, but sank at the end of the month to finish lower as interest rates surged
  • Fed Chair Powell’s comments at the annual Jackson Hole Economic Symposium reset market expectations for interest rate hikes the remainder of 2022, with a more hawkish tone
  • The benchmark S&P 500 slid 4.2% to finish down 17.0% for the year, while the Dow Jones Industrials fell 4.1%, to close down 13.3% YTD but both still well above 2022 lows from mid-June 
  • The tech-heavy and interest rate sensitive Nasdaq was hit the hardest closing down 4.6% for the month, and slipped back into bear market territory
  • Small- and Mid-cap stocks also fell, with the Russell 2000 and S&P 400 losing 2.2%% and 3.3%, respectively
  • Overseas, developed market stocks also posted losses in August; the benchmark MSCI EAFE fell 5% and finished back in bear market territory down 21.2%, while Emerging Markets edged higher by 0.03%
  • July CPI dipped 0.6% to +8.5% YOY; while still high, it’s an encouraging sign as oil and gas prices have been declining
  • Interest rates jumped in August; the 10-year Treasury Note yield rose 23 basis points to 3.15% and the Bloomberg Aggregate Bond Index fell 2.8%, closing the month down 10.8% for the year

September Update

Despite a rough August and renewed concerns about a more aggressive Fed, stocks have had a solid start to the historically bumpy September. US stocks have posted 2%-plus gains across the board ending September 9. Overseas, developed foreign markets have edged slightly lower, while emerging markets are down 2.4%.

The markets are awaiting the August CPI report on September 13, for another gauge of inflation trends, which will guide future Fed policy. The decline in oil and gas prices in August, which have continued in September, bode well. Core inflation will be widely watched as well, as rents have remained stubbornly high.  

The market environment remains challenging, and we continue to encourage investors:

  • Remain well-diversified
  • Maintain discipline and patience
  • Focus on the long-term
  • Refrain from making large portfolio changes
  • Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.   

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results