Equity markets continued July’s rally into mid-August on weaker than expected inflation data, with the expectations it would lead to a slowdown from the Fed’s current rate hiking cycle. From the June lows to mid-August, the S&P 500 returned over 17%, while the Nasdaq 100 Index returned over 21%. The rally ended on August 26th, with Federal Reserve Chairman Powell’s hawkish speech at the Jackson Hole Economic Symposium.

As we mentioned in our July newsletter the market appears to be playing a dangerous chicken and mouse game. Added inflationary pressure would weigh in on the Federal Reserve’s decision on future monetary policy decisions. The chairman made it abundantly clear he will continue to use “restrictive policy” for some time to tame inflation.

After his speech major stock indexes retreated, end the month 6% lower from their closing levels on August 25th. Bond prices dropped as yield rose.

In the beginning of August, the market was pricing in an additional 95 basis points of interest rate hikes by year end. In August, the market priced in an additional 45 basis points of tightening bringing the year end rate of 3.625%. For comparison, In January of this year the Fed Effective rate was .125%

The graph below illustrates the added federal reserve rate increases that are priced into the market at the end of August. Our current overnight Federal Funds rate is at 2.33%. By mid-next year that rate is priced to be close to 4%. That would put the prime rate to 7.25%.

The significant jump in interest rates has impacted both fixed bond prices and stock prices. As interest rates increase, cost of capital increases which impacts earnings.
The big question in the market is when inflationary pressures will subside and when will the Fed slow the pace of rate increases. By most standards inflation is too high, and I feel the Fed will not change its course even if we get lower CPI prints. Chairman Powell believes “a single month’s improvement falls short of what the Committee will need to see before we are confident that inflation is moving down.” Powell also continues to re-iterate that every meeting is live, and their decision is data dependent. It will take several weaker inflationary prints before the Fed tones down its hawkish rhetoric.

As asset classes are moving rapidly, we continue to re-balance portfolios ensuring prudent capital allocation.

As we mentioned in our previous newsletters, short term volatility has little impact on long term investment results. A well-diversified balance portfolio is a time-tested strategy for long term capital. This market volatility is common.
As always if you have any questions feel free to reach out.

Best,
Bob

Opinions are those of the author and not necessarily those of Guardian or its subsidiaries

The S&P 500 Index is a market index generally considered representative of the stock market. The Index focuses on the large-cap segment of the U.S. equities market. The Hang Seng Index (HSI) is a market-capitalization-weighted stock market Index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.

Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Statistics sources from Central Bank Rates, Bloomberg, and Nasdaq

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