Weekly Market Update September 2, 2022
Dow Jones Industrials 31,318.44 -3.0%, S&P 500 3,924.26 -3.3%
Nasdaq Composite 11,630.86 -4.2%, US Ten Year 3.193
The unwinding of the mid-July through mid-August stock market rally continued through this week. The rationale for the rally was very frail; July inflation coming in at 8.5%, a bit below the expected 8.7% and a modest improvement from June’s 9.1%. That led many investors to believe that the Federal Reserve might be less aggressive in fighting inflation through higher interest rates. But it was always a case of cognitive dissonance; 8.5% inflation is still very high, the highest in over 40 years. In Powell’s August 26 Jackson Hole statement, he repeated most forcefully that the central bank will be vigorous in pursuing its goal of 2% inflation.
Who does the Federal Reserve Board of Governors blame for inflation? The federal government. A paper co-authored by economists Leonardo Melosi of the Chicago Fed and Francesco Bianchi of John Hopkins and published by the Kansas City Bank essentially admits that the Fed cannot control inflation, due to federal spending: “This increase in inflation could not have been averted by simply tightening monetary policy. US government fiscal policy contributes too inflationary pressures and makes it impossible for the Fed to do its job.”
Prices started climbing in March of 2021 with the passage of the American Rescue Plan, which added to demand while the supply chain issues were worsening. More recent fiscal policy like the misnamed Inflation Reduction Act of 2022 has worsened the situation and it will be exacerbated by the proposed Student Loan Forgiveness program. The central bank knows it will be tasked to assume more government debt onto its balance sheet while simultaneously raising short term rates. The Federal Reserve and the Federal government are working at cross purposes. Until this ceases any stock market rallies will be short-lived.
If history is any guide, things may look better for stocks toward the end of the year. Referring to the above chart from Yardeni Research, while September is historically the very worst month for stocks, things improve through October and November and into December, which is one of the best months for equities.
In the meantime maintain a decent cash balance and emphasize the stocks of long-established companies that are historically profitable and will continue to generate revenues even during a recession. Consumers always shop for food and essentials, and the producers of these goods and the retailers that sell then should hold up. With colder weather coming natural gas supplies will come under pressure and prices will rise, so exposure to traditional energy companies remains a must. The ability for utility companies to pass higher cost to customers make them attractive as well.
Have a Great Week,
Paul M. DeSisto, CFA
Executive Vice President and Managing Director
M&R Capital Management, Inc.
25 Union Place
Summit, NJ 07901