Market Update: September 2, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The market has finally pulled back after a multi-week rally beginning in July. Here’s where the market stands so far this year. The S&P started off the year with a 23% pullback, rallied 17% to recover half of the losses, and is down 7% from the highs established in August. The question remains, was that 17% rally the beginning of the end of the bear market? Or was that simply a bear market rally with new lows yet to come?

In the news this week, the august jobs report showed the addition of 315,000 new jobs as the unemployment rate crept up to 3.7%. Gas prices at the pump continue to fall as we enter into the Holiday weekend. And US regulators banned the export of advanced US Artificial Intelligence microchips to China.

Now, the Fed meeting at Jackson Hole is the primary reason for the market weakness. Since the July 26th Fed meeting where remarks from the central bank appeared Dovish, the market began its strong multi-week rally. Since that meeting, central bankers have spent their time reassuring the market that they were committed to fighting inflation which ultimately led to the hawkish stance at Jackson Hole. Thus, the market essentially gave back all of it’s returns since it incorrectly assumed the Fed was done increasing interest rates.

Likewise, the bond market has made some changes as well. Prior to the Jackson Hole meeting, the bond market was actually pricing increasing chances of a rate cut in the summer of 2023. Since the Jackson Hole meeting, those chances have since dwindled and the market is currently predicting “higher-for-longer” rates through 2023.

However, the 5-year forward inflation expectations rate is essentially unchanged over the last year, stuck at 2.4%. This implies that the market is not expecting long term inflation rates to remain at the elevated levels they’re currently at. This also implies that the Fed, despite evidence that inflation is abating, is stubbornly committed to fighting inflation with rising rates and will not let up until they’re absolutely sure inflation has returned to normal. Even if it means pushing the economy into a recession.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 2, 2022, from FactSet Database.

2.Federal Reserve Bank of Atlanta. “Market Probability Tracker.” Updated August 30, 2022. Retrieved from https://www.atlantafed.org/cenfis/market-probability-tracker?panel=1

Federal Reserve Bank of St. Louis, 5-Year, 5-Year Forward Inflation Expectation Rate [T5YIFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T5YIFR, September 1, 2022.

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