Hope you are all doing well. The S&P 500, NASDAQ, and Dow posted fractional weekly gains. Large caps regained ground lost the previous week. The modestly positive weekly results for U.S. large-cap stocks didn’t extend to smaller companies. The small-cap benchmark fell in the wake of the Fed chair’s speech on Friday morning. Stocks traded in a narrow range for the third consecutive week. On Wednesday we learned that the world’s greatest living artist, Yayoi Kusama, passed away. I have broken down this week’s update using some of her most notable works.
Infinity Mirror Rooms
At Jackson Hole, the Fed Chair, Kevin Warsh, used his Friday keynote speech to warn against a “hall of mirrors”. He means the Fed seeks to avoid a dangerous feedback loop. One where financial markets rely heavily on Federal Reserve guidance for their trades, while the Fed in turn relies on market prices to gauge economic health. He reaffirmed the Fed’s commitment to its 2% inflation target. Warsh was clear that restoring price stability remains the central objective. That leaves the possibility of additional rate hikes if inflation remains elevated. He said that the central bank “must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
Dots Obsession
Markets are obsessed with the Fed’s dot plot because it serves as a quarterly roadmap for where central bankers expect interest rates to head in the future. This makes every reading of the Fed’s preferred inflation gauge important. The latest reading came this week as the Personal Consumption Expenditures Price Index (PCE) rose 0.2% in July relative to the previous month. That brings the PCE’s annual rate up to 3.7%. Both of those figures are slightly above economists’ consensus expectations. Those numbers, coupled with Warsh’s hawkish speech, increased expectations for a rate hike as early as September.
The Obliteration Room
Corporate earnings have been great, the economy solid, and the labor market near full employment, and to consumers none of that matters. Prices are going up, and this is obliterating any positive sentiment the consumer is feeling. The monthly gauge of U.S. consumer sentiment fell amid continued worries about the inflation outlook. The University of Michigan reported on Friday that its Index of Consumer Sentiment fell to 51.7 in August, down from a 55.2 reading in July. Despite the decline, sentiment is still above the record low of 44.8 recorded three months earlier. If inflation keeps moving away from the Fed’s target, expect sentiment to continue to drift downward.
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