Investors have become accustomed to temporary bear market rebounds, followed by even more severe losses. Nearly half of the trading days have seen the S&P 500 move up or down above 1%, indicating a higher level of volatility. In the middle of the month, the S&P 500 plummeted by more than 13% over the course of 10 days, in a defeat that could have been shocking under more normal conditions. But these are not normal times for markets.
As expected, inflation is still the tail that moves the dog in the markets. But something has changed, and it largely comes down to perception. Consider how the Federal Reserve's stance on inflation has evolved. Last year, Fed officials said inflation would not be a problem.
The Fed then promised that it would be “transitory”. They began to launch a “soft landing” for the economy, even as rates rose, and now they warn that more economic problems lie ahead by doing what is necessary to control inflation. Market participants have been slow to catch up with the party line and that is reflected in enormous volatility, says David Schassler, director of quantitative investment solutions at VanEck. Strong inflation will not die out in October and there will be no Fed meeting until November.
Still, October should offer valuable clues about the pace of growth and whether the Federal Reserve's aggressive strategy will boost the US economy. Retirement planning, budgeting and suite of free wealth management tools are all important factors to consider when looking at stock market performance. The September market performance was a wake-up call for many investors, especially when the August Consumer Price Index (CPI) report showed that inflation had not reached its peak. According to Cliff Hodge, chief investment officer at Cornerstone Wealth, investors can expect similar volatility around the release of monthly inflation readings in October: “Inflation remains the most important thing”, he says.
Schassler will look at “the most rigid forms of inflation, such as food and housing prices, in the next CPI report”. While one-month data isn't likely to move the needle significantly, he says this report is no exception. Even so, high inflation is unlikely to decline significantly, let alone return soon to the Federal Reserve's target of a 2% rate in the near future, Schassler warns. The rhetoric of Fed policymakers will continue to shake up markets in the coming months.
If the Federal Reserve finally moves away from its aggressive rate-raising strategy, it will do so in the face of still-high inflation. The good news for growth-minded investors, like Hodge, is the wealth of information to look for in the coming months. This is because the earnings season, when publicly traded companies report their quarterly results, begins to take shape. The quarterly earnings reports that companies release in the coming weeks will be crucial.
Investors will focus less on previous results and more on what companies have to say about their prospects for the rest of the year and next year, says Michael Sheldon, CEO and chief investment officer of RDM Financial Group. This idea of readjusting expectations should be a key issue, as some sectors of the financial markets indicate a consensus on “a fairly resilient economy next year”. But Hodge says that may be too optimistic. Hodge is paying more attention to key growth indicators, especially to two reports that the Supply Management Institute (ISM) will present in the first week of October.
The institute's manufacturing PMI and services PMI reports will provide valuable information. While “concrete” data, including weekly unemployment claims report on how many Americans receive unemployment benefits still point to a strong economy, Hodge wants to identify any signs of weakness in key indicators and slowdown in real estate activity is an important example. Even with S&P 500 in a bear market, Hodge's concern is that a major slowdown in pace of economic growth has not yet been fully discounted in stocks and there will be more volatility as that happens. Investors seeking relief from volatility this year will have to wait until Federal Reserve moves away from its aggressive rate-raising strategy and midterm elections are over.
However until then market will continue to be a challenge for investors and diversifying portfolio beyond stocks and bonds into those assets that act as hedges is recommended by Schassler. It advises that investors could consider dedicating 10-15% of their portfolio to “real assets” including commodities and natural resource stocks but any changes should not come at expense of long-term investment strategy. One can argue in favor of bonds as inflation will eventually decline and pace of economic growth is likely to slow as expected according to Hodge's advice. The stock market had a winning week as investors considered possibility of Federal Reserve slowing down due to sharp interest rate hikes and took news very seriously even amid recent reports of persistent inflation affecting consumer prices on all kinds of things from car repairs to visits to vet and costs of goods and services overall.
The S&P 500, Dow Jones Industrial Average and Nasdaq Composite had rare weekly gains in an ongoing bear market which is also in middle of earnings season right now with companies reporting positive results especially in banking and technology industries but social media stocks warned about lower than expected advertising revenues causing their stock prices fall in news.
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