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After a Great Investing Summer August Starts Slow

It’s was good summer for investors until the month of August. A preponderance of good economic reports, coupled with less aggressive monetary policy, has created favorable conditions for stocks. More specifically, we’ve seen consistently declining inflation rates and stronger-than-expected economic output (as measured by Gross Domestic Product, GDP). This has allowed the Federal Reserve to signal we’re at, or near, the end of their interest rate hiking cycle. Yet as August has started, rising interest rates have caused a pull back in the markets.

The broad economy continues to be resilient despite 11 interest rate hikes by the Fed since March of 2022. Low unemployment and plentiful job opportunities have been key drivers. Keep in mind the consumer accounts for about 70% of economic activity. With unemployment near historically low levels, it is not a surprise that consumer spending remains firm. We see this very clearly in the services sector where a ramp-up in spending continues. There is evidence of waning inflation beyond the touted headline CPI number just one year ago. The latest core Personal Consumption Expenditures (PCE) index, the Fed’s preferred gauge and the benchmark for its 2% inflation target declined from 4.6% in May to 4.2% in June. The core number strips out food and energy prices, which tend to be volatile. This is the lowest level we’ve seen for core PCE since September 2021.

What has been the Fed’s reaction to this trend of declining inflation? After a one-meeting “skip” from rate hikes in June, the central bank delivered a 25-basis point increase at the July meeting. In our view, the Fed wanted to make a hawkish

statement before a two-month summer break. Now the Fed has a chance to evaluate quite a bit of data before deciding on its next move. The next Fed Open Market Committee meeting is scheduled for September 19-20.

Wharton School finance professor Jeremy Siegel had some interesting comments after Chair Jerome Powell’s last press conference. He was pleased that Powell recognized the risks of the Fed overplaying its hand. “This was the best new conference I’ve heard from Jay Powell in over a year,” Siegel told CNBC. “He virtually came close to saying there’s balanced risk out there. Not quite, still a little more on inflation, but he really acknowledged there were potential downside risks.”

Siegel points out that the Fed’s rate increases have not had as much negative effect on the economy (and markets) as expected. Although there are no rate cuts in sight, by taking a “balanced” approach the Fed has opened the door to further stock market gains. This is consistent with what we’ve been saying all year about the positive effects of a Fed “pause.”


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