The stock market’s rally began in mid-June and continued through mid-August when the latest inflation data showed a slowdown from July, albeit still at an 8.5% annual rate. As of August 16th, the S&P 500 Index was up over 4% for the month. On that same day, the S&P 500 Index traded at its August high, and the Federal Reserve released its prior meeting’s minutes, making it clear that they would not stop with its rate hike plans until “inflation comes down substantially.” In other words, July’s slight decrease in CPI ended up being an overreaction to slightly positive news for financial markets, to only not mean much relative to the Federal Reserve’s long-term inflation target of 2%. The following two weeks saw the S&P 500 Index decline by more than 8%, ending August with a loss of just over 4%.
Meeting minutes were just the start of the Fed’s eventful August when its annual Jackson Hole Economic Symposium commenced. Until recently, investors had become accustomed to the Fed saying whatever the markets wanted to hear. 2020 was a prime example of this when the performance of equity markets dictated Fed actions. Fast forward to 2022, and Fed actions are driven by inflation, more consistent with their dual mandate of price stability and full employment. Chair Powell’s speech at Jackson Hole confirmed his pledge to combat inflation by stating they will continue to raise rates, and this action could cause “some pain” to the U.S. economy. The Fed has not taken a stance like this since Paul Volker chaired the institution during the 1980’s inflationary regime.
The institution that spent most of the last decade supporting markets is now changing course to combat multi-decade high inflation, reminding us of the only constant in investing: the markets hate uncertainty. Market declines and uncertainty can be unnerving for investors. The critical piece to remember is that the Fed is taking a short-term stance. The short-term is impossible to plan for, which is why we invest for the long-term and mitigate the short-term. No one, not even Chair Powell, knows what “some pain” really means. Markets could have already felt the pain caused by uncertainty rather than any additional pain that may come. Either way, “some pain” is a temporary event that portfolios are built to withstand while working towards achieving long-term goals.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | September 2022
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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