Last Week On Wall Street A comprehensive sell-off on Friday following comments by Fed Chair Jerome Powell drove stocks to losses for the week. The Dow Jones Industrial Average tumbled 4.22%, while the Standard & Poor's 500 dropped 4.04%. The Nasdaq Composite index fell 4.44% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost 1.10%. Under Pressure Stocks dropped on Friday following Powell's remarks reiterating the Fed's inflation-fighting resolve. While his comments did not break new ground, markets reacted severely, perhaps on worries that interest rate hikes may continue into next year. After starting the week sharply lower on renewed rising interest rates and economic slowdown fears, markets staged a modest turnaround beginning mid-week. Stocks rallied on Thursday, sparked by a revised Gross Domestic Product estimate showing the economy's shrinking less than initially estimated. Thursday's rally also got a boost from regional Federal Reserve Bank presidents, who suggested future rate hikes may be in line with market expectations. Powell at Jackson Hole In his much-anticipated speech at the Jackson Hole Economic Symposium, Powell unflinchingly reaffirmed the Fed's commitment to raising rates to lower inflation, even if it results in causing pain to individuals and businesses. Wall Street focused on Powell's presentation in the hope it might provide greater clarity on future Fed direction, though his remarks ultimately went no further than restating past communications. Powell commented, "We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to two percent." This statement may have put to rest any thoughts that the Fed would soon pivot on rate hikes.
Tuesday: Consumer Confidence. Job Openings and Turnover Survey (JOLTS). Wednesday: Automated Data Processing (ADP) Employment Report. Thursday: Jobless Claims. Institute for Supply Management (ISM) Manufacturing Index. Friday: Employment Situation. Factory Orders. This Week: Notable Companies Reporting Earnings Tuesday: Best Buy Co., Inc. (BBY), HP, Inc. (HPQ). Thursday: Broadcom, Inc. (AVGO), Hormel Foods Corporation (HRL). Final Thoughts Powell did exactly what we thought he would. He talked tough on inflation. Yes, they will raise rates at least a few more times to help tame inflation. If I had to guess I would say two more hikes and then pause through mid-term elections and look at the data. Current data shows inflation is starting to crack, so there is light at the end of the tunnel. I have written copious amounts on this the past few weeks. Fundamentally, nothing changed at all on Friday yet the market had a pretty big down because of Powell’s speech. I think a lot of that can be blamed on the terribly negative sentiment that has overtaken the market. The market ran up a lot in a short period of time. It isn’t surprising it might take a breather or two. The lows in June were based on expectations inflation would run away and the Fed would be forced into early 1980’s interest rate levels. It appears the worst-case scenario has been averted and that’s why stocks rallied into August. The Fed is trying to maintain credibility as a year ago they said inflation wouldn’t go much higher. Well, they were wrong, and it did go higher. Inevitably they will push rates higher than needed and will then have to stop or go the other way. The economy really has begun to slow. The stock market isn't the economy in that it leads. Stocks are looking ahead 6-9 months or at least trying to. Six to nine months from now inflation will undoubtedly be lower and putting less pressure on the Fed to continue to raise interest rates. If earnings hold up, which they have so far, the market should be higher. If earnings break down, it would be a different story. The consumer still seems to be consuming at full speed and earnings aren’t forecasted to collapse. Sentiment is at an extreme low. Markets tend to turn around extremes in sentiment both positive and negative. Let’s see what happens in the week ahead. Stay tuned...
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THIS WEEK'S UPDATE
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August 29, 2022
