ND&S Weekly Commentary 8.29.22 – Don’t Fight the Fed

August 29, 2022

The summer market rally cooled off last week as hawkish comments from the Fed portrayed a restrictive monetary policy.

For the week, the DJIA fell 4.20% and the S&P 500 dropped 4.02%. The tech-heavy Nasdaq slid 4.43%. International markets were mixed. For the week, the MSCI EAFE Index (developed international) finished lower by 1.91% and emerging market equities (MSCI EM) increased 0.55%. Small company stocks, represented by the Russell 2000, were down 2.93% for the week. The 10 YR US Treasury closed at a yield of 3.04% (up 6 bps over the week) and as a result, fixed income, represented by the Bloomberg/Barclays Aggregate, fell 0.36% as yields moved higher. Gold prices finished at $1,751/oz – down 0.66% on the week. Oil prices closed at $93.06 per barrel.

The Federal Reserve gathered last week for their Jackson Hole economic symposium. The Federal Reserve Chairman Jerome Powell spoke for roughly nine minutes and warned against any premature loosening of policy. “Reducing inflation is likely to require a sustained period of below trend-growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” said Powell. This hardline stance rattled equity markets on Friday sending all major U.S. indices down over 3% on the day.

Last week also brought a preliminary look at several manufacturing and services PMI data sets, all of which point towards a slowing economy and some progress on slowing inflation and improving supply chains. The headline Flash US PMI registered a reading of 45.0, down from a reading of 47.7 in July. The PMI reading for the service economy fell to 44.1, a sharp miss compared to expectations. The manufacturing reading fared a little better coming in at 51.3. Within the report, input prices eased for the third consecutive month, however companies are having higher cost burdens associated with the increase in interest rates. The July Durable Goods report showed a 0.4% increase in business spending in July. On Friday, the PCE Price Index (The Fed’s preferred inflation measure) came in at 6.3%, down from 6.8% in June. Core PCE came in at 4.8%, still well above the 2% target.

We think the Fed is ultimately doing the right thing to tackle inflation even if it means some short-term pain for the markets and economy. The markets have pulled back a bit over the last couple of weeks to levels we were at in late July. We are continuing to adjust portfolios to harvest some tax losses and will continue to take advantage of attractive short-term rates for cash and fixed income.

“The best way out is always through.” – Robert Frost