September 7, 2022
Dear Clients & Friends,
When Charles Dickens authored his famous opening lines in The Tale of Two Cities, “it was the best of times, it was the worst of times”, he might as well have been referencing the stock market last month. The strong market rally that peaked in mid-August was viewed by many Wall Street analysts as the possible transition from a bear market to a bull market, based on the surge in breadth that stocks enjoyed and the magnitude of the two-month rally that began in mid-June totaling 17%. However, before the bulls could fully rejoice, the market reversed course and finished down 4.24% for the month.
The market rebound and overall bullish sentiment began in earnest when Federal Reserve Chairman Jerome Powell suggested at the late July Fed meeting that the trajectory of interest rate hikes could ease later in 2022. Market participants translated his words to mean that the Fed would complete its aggressive rate hiking campaign to curtail inflation sooner than initially projected. Stocks climbed dramatically, and the S&P 500 Index recorded its largest post-meeting rally ever recorded. Some meme stocks even came back to life too.
The second quarter earnings season, particularly with regard to guidance, also helped propel the market higher this summer because of the widespread pessimism ahead of results. Companies delivered stronger earnings than initially estimated, with 75% of companies reporting earnings per share (EPS) above estimates despite intense cost pressures and continued supply chain disruptions. Energy companies were the undisputed winners in the second quarter on higher oil and natural gas prices, and shareholders were rewarded with both dividends and price appreciation.
Investors remained hyper-focused on inflation (and rightfully so), where pressures have shown signs of easing, and perhaps plateauing, if not completely peaking. Headline readings for the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures Index (PCE) have all moved in the right direction, but clearly, it’s not been quickly enough for the Fed as they campaign to restore price stability through interest rate hikes to dampen consumer demand. Still, lower gasoline prices have helped to bolster consumer sentiment and lower consumer’s expectations of longer-term inflation.
As the rally intensified in mid-August, a parade of Fed officials gave interviews during which they made it clear that the Fed’s work to establish price stability was nowhere near complete. This became a major theme as market participants hung on Jerome Powell’s every word on August 26 at the Jackson Hole, Wyoming forum for global central bankers. In a concise and clear 10-minute speech, Powell dispelled any notion of an early pivot towards easier monetary policy. In fact, it was just the opposite. Powell mentioned “inflation” 46 times and “price stability” more times than seemed possible in such a short speech, he made it crystal clear that the Fed’s path towards restoring price stability “will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” Not surprisingly, stocks ended with a profound sell-off (down -3.39% on the day). As I’ve written before, the only way stocks will begin a sustainable march higher is once inflation is brought under control, therefore, as long-term equity investors we should all applaud Powell’s steadfast commitment to stamping out persistently high inflation at all costs-- regardless of the short-term consequences to stock prices.
As the market closed out August weaker and begins the seasonally weak month of September, questions about whether the bear market has truly ended still linger. September data releases and the upcoming Fed meeting on September 20/21 could help provide some important answers for investors. Chairman Powell has reminded us many times that the Fed will be data dependent in making policy decisions. Nobody knows what the future holds, but over time portfolio values will once again resume their permanent upward advance—they always do.
As always, thank you for your continued trust and loyalty. Please contact me directly if you have any questions-- that's what I'm here for.