Weekly Market Update

Entering the week, the S&P 500 had just rallied over 5% in four trading days as investors positioned for a softer than expected consumer price index (CPI) report, but unfortunately inflation had other ideas. Despite the Fed already hiking rates by 225 basis points (2.25%) so far this year, Tuesday’s CPI report for August came in materially hotter than expected (8.3% vs. 8.1% consensus estimates) and interest rates surged while the stock market rally turned into a rout with the S&P 500 falling over 4%, its largest single day decline since June 2020. Stocks showed some signs of stabilization around 3,900 for the S&P 500, buoyed in part by headlines of a US rail strike being averted, but Thursday night’s earnings miss from FedEx, which many view as an economic bellwether, further undermined hopes of a soft economic landing and stocks closed at their lowest levels since mid-July.

While investor sentiment is once again glum and we expect more market volatility due to no shortage of headwinds, not all news this week was bad. Obviously, Tuesday’s CPI left much to be desired, but more indications of improving supply chains and slowing inflation expectations have emerged. For example, Friday’s Michigan Consumer Sentiment survey showed the lowest one-year (4.6%) and five-year inflation expectations (2.8%) since the summer of 2021 while inflation expectations from the New York Fed survey have also declined substantially (see chart below). Furthermore, while investors will undoubtedly be bracing for Wednesday’s Fed meeting announcements and a 75 bps hike, the track record for S&P 500 returns on such days has actually been very strong during this tightening cycle, with every Fed Day seeing gains over 1% S&P 500 bounces (+2.24% on 3/16, +2.99% on 5/4, +1.46% on 6/15, +2.62% on 7/27). Ultimately, investors need to get through the next two weeks, which are seasonably the weakest period of the year, and get to the mid-term elections in roughly 8-weeks as per data from RBC Capital Markets equities (S&P 500) tend to see relief rebounds over 7% following midterms and have been positive 12-months later every time since 1950.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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