Weekly Market Update: September 5, 2022

Alex Ralicki |

Investors remain focused on the impact of the Federal Reserve’s fight against inflation. Although prices have risen at a pace not seen for decades, recent signs suggest that inflation may have started to peak. Specifically, the PCE (Personal Consumption Expenditures) Index increased 6.3% during the month of July, year over year, which was an improvement compared to the June showing. The cooler report was partly a reflection of falling fuel prices. However, the “core” number (excluding food and energy costs) also moved lower, suggesting broader based progress.

Nonetheless, the Federal Reserve has vowed to remain aggressive, for now. At its late-August summit in Jackson Hole, Wyo., Chairman Jerome Powell delivered a hawkish speech, indicating that more data will be needed for the central bank to alter its course. Furthermore, inflation remains above the central bank’s previously stated 2% target rate, and additional progress is likely necessary. The remarks surprised traders operating under the assumption that a more supportive policy could be forthcoming. That outcome now seems less plausible, sparking concerns that another 75-basis point hike could be considered at the late-September meeting. Meanwhile, the economy, supported by a healthy labor market, can likely withstand further tightening actions from the Fed, if necessary.

Elsewhere, the corporate outlook is somewhat cloudy. Numerous companies beat analysts’ second-quarter expectations, but forecasts for the remainder of the year have been uninspiring. As equity valuations are based heavily on profit projections and interest-rate assumptions, this could put pressure on the market.

A meaningful stock market rally commenced in mid-June. However, the S&P 500 Index recently reached the 4,300 level (near the 200-day moving average), where a sharp pullback quickly ensued. Possibly, traders had become overly bullish, choosing to look past many of the challenges that still need to be resolved. It is not clear if stocks will firm up at this point, or will retest the low point hit earlier in the summer.

Conclusion: Market volatility can be frustrating, but may provide opportunities. For instance, investors may choose to rotate capital into quality names at lower prices.

Source: ValueLine.com