September 8, 2022,
We all enjoyed the respite of the summer stock market rally, in which the S&P 500 bounced more than 15% from its mid-June low. Unfortunately, that trend fizzled in mid-August, and we have given back about 7% since. It was, however, encouraging to see that buyers are ready to step into oversold stocks when the opportunity arises.
What dampened the summer optimism? In a word: inflation. Investors had taken solace from their hypothesis that inflation was peaking and the Federal Reserve would soon end its rate increases. Jerome Powell, Chair of the Federal Reserve, firmly refuted that theory in his address at Jackson Hole. Inflation is still far too high (we see you nodding) and the Fed has a lot of work left to do to battle it.
When the Fed tries to cool the economy, investors fervently hope that they can engineer a “soft landing”. In this scenario, the economy slows smoothly, without a recession or sharp rise in unemployment. A “hard landing”, on the other hand, implies a recession and financial discomfort for economic participants. Powell’s comments made it clear that the Fed is still concerned about embedded inflation and is willing to cause ‘some pain’ to address it.
Compared to other global markets, the U.S. is fortunate. We have experienced sharp price increases in energy and food prices, but compared to Europe, our situation is mild. Natural gas prices in Europe have risen a shocking 400% over the past year (U.S. natural gas is up just 162%). Natural gas impacts fertilizer prices, so this increases the upward pressure on food prices. The U.S. has had a slight reprieve in energy prices lately. We expect this reprieve gave the Fed a little reassurance, but they are still concerned about the overheating job market and its impact on wage inflation.