Market Commentary for August 2022

August 2022 - The Powell Effect

Stocks back-pedal as investors grapple with an overly bearish Federal Reserve and Bank of Canada remain on a tightening path. Will the rate hikes end soon? Have they gone too far?

Markets

For a lack of a better term the month of August was a non-event. Investors spent most of the month anticipating Chair Powell’s speech, which ultimately didn’t do much to give investors confidence and sent stocks on a downswing to finish the month in negative territory compared to July’s sparky performance. The S&P 500 declined -4.43% and the S&P TSX -1.87%, as investors reacted to comments from the Fed like, “the historical record cautions strongly against loosening policy prematurely”. Leading up to Powell’s remarks investors were anticipating rates would ease later in 2023, but his comments squashed those hopes sighting “reducing inflation is likely to require a sustained period of below-trend growth” and “there will likely be some softening of labor conditions, and some pain for households”. If that wasn’t enough of a ‘Debbie downer’, additional remarks that embellished the overall bearish tone were heard loud and clear. For example, “Restoring price stability will likely require maintaining a restrictive policy stance for some time…the Fed must keep at it until the job is done”. One can only imagine the exhilarating conversation at a dinner party. We jest.

On the other side of the coin however, is a belief that inflation has already peaked. Not too far-fetched considering up to this point inflation has largely been driven by supply chain constraints and easy money. To prove the point, summer activity stabilized with a modest 0.2% rise in real consumer spending, there was a much narrower trade deficit, solid gains in capital goods orders and shipments, and a recent retreat in jobless claims. This all suggests the economy churned out mild growth. In addition, both Q1 and Q2 corporate earnings were positive overall. The point is supply chains are improving and the consumer is trudging along. There’s also no question that the rapid rate hikes have dramatically slowed things down for real estate as the housing sector remains in full-blown retreat. New home sales dropped to the lowest level since early 2016, even below pandemic lows, and pending sales are heading for levels last seen over a decade ago. Even more convincing was the news that real gross domestic income rose at a 1.6% annualized pace over the first half of the year, which doesn’t sound recessionary to us. Currently, our thoughts are leaning towards short-term rates topping out somewhere between 3.5%-to-4.0% with the expectation that the wide variety of special factors that contributed to boosting inflation in the past 18 months, will now begin to reverse – notably supply chain hiccups and overheated demand for goods. We will be eagerly watching.

If you would like to receive a full copy of our August market commentary, email us at mmbwealth@nbpcd.com!