Weekly Market Update: September 19, 2022
The inflation situation remains problematic. The August reading on consumer prices came in stronger than expected, with the core-Consumer Price Index (CPI) figure, which excludes the volatile food and energy components, rising 0.6% on a month-to-month basis. That was double the consensus forecast. For the 12-month period, the CPI and core-CPI rose 8.3% and 6.3%, respec- tively, with both advances topping expectations. All the broad market indexes recorded their worst single day losses since the first year of the COVID pandemic in 2020.
Investors anticipate that the Fed still has a lot more work to do in its fight to tame inflation. Several central bank leaders, including Chairman Jerome Powell, struck hawkish tones on monetary policy leading into this month’s Federal Open Market Committee (FOMC) meeting. Based on these hot inflation figures, the FOMC meeting, which was to take place after this report went to press, was expected, at the very least, to produce the third-straight 0.75% hike to the benchmark short-term interest rate. The expectations for additional rate increases into 2023 also rose in the wake of the latest consumer pricing data.
The U.S. economy is hanging in, but with the Fed aggressively tightening the monetary reins, it may not hold on for long. Both manufacturing and non-manufacturing (services) activity expanded for the 27th-consecutive month in August, and recent jobs growth remained solid. However, with the central bank notably decreasing the money supply, via rate hikes and balance sheet reductions, further demand destruction seems likely. On point, the housing and homebuilding markets were under significant pressure this summer, with higher mortgage rates raising affordability concerns and leading to a sharp drop in demand for homes.
At least a mild recession is beginning to seem inevitable. The continued inversion of the Treasury market yield curve suggests such, and the slowing profit growth in Corporate America may be another sign. The consensus third-quarter earnings growth estimate for S&P 500 companies is less than 4%. This would mark the lowest rate since September, 2020 when the coronavirus pandemic was raging. According to FactSet Research, nearly half of the S&P 500 companies used the term “recession” during their earnings calls, which was well above the five-year average of 52 companies.
Conclusion: The slowing growth environment and continued inflation concerns have made for an unstable investment landscape. With this backdrop likely to persist for some time, a cautious investment stance is recommended.