Market Monitor: August Mid-Month Update
Headlines and Highlights
- Inflation abates: The annual inflation rate as measured by the Consumer Price Index fell back to 8.5% in July from a 40-year high of 9.1%. Inflation was flat on a monthly basis after 25 consecutive months of increases as declines in energy, used cars and airline fares offset rising grocery and dining-out costs. Core CPI, which excludes energy and food prices, also slowed to 0.3% last month and held at 5.9% year-over-year.
- Markets extend winning streak: Stock indexes rode investors’ optimism about cooling inflation and hopes for fewer interest-rate hikes to reach their highest levels since early May. The S&P 500 posted its first four-week winning streak since 2021 and is up 13.3% in the third quarter and 17% since the June 16th market bottom. The small-cap Russell 2000 has made similar gains to reduce its 2022 loss to 9.5% while international developed (6.2%) and emerging-markets stocks (2.0%) also are both up in the third quarter. Taxable and municipal-bond benchmarks are up between 1% and 2% this quarter.
- Labor market recovery reaches landmark: The economy added an unexpectedly high 528,000 jobs in July, restoring total U.S. employment to the pre-pandemic level of just over 152.5 million. The additions effectively complete the second-fastest job market recovery since 1981. Unemployment edged down to 3.5%, also the lowest since February 2020. Jobless claims rose to their highest level in nine months this month, a sign the labor market is starting to cool.
Chart of Interest
Possible turning point: Inflation ebbed in July after a nearly uninterrupted two-year run higher.
Sources: Bureau of Labor Statistics, Altair Advisers
- The stock market’s summer rally has occurred across all sectors but has been led by consumer discretionary and technology stocks, up 24% and 19% respectively since the end of June. While growth stocks have rebounded more, value stock benchmarks also have delivered double-digit gains this quarter.
- Expectations of future inflation fell sharply in July, according to a survey by the Federal Reserve Bank of New York, suggesting the Fed may be making headway in efforts to keep inflation from becoming entrenched. Median expectations were for 6.2% inflation a year from now and 3.2% in three years, down from 6.8% and 3.6% respectively in June. The Fed’s primary objective in raising rates is ensuring that high inflation does not stick around, as was the case in the 1970s during the longest period of U.S. inflation.
- The Inflation Reduction Act, being signed into law by President Biden on Tuesday, targets inflation longer-term by aiming to reduce the federal deficit, promote the production of renewable energy and limit the price growth of certain prescription drugs. Despite its title, the nonpartisan Congressional Budget Office concluded that the bill will have a “negligible effect” on inflation this year and next.
- Consumer sentiment as measured by the University of Michigan rose preliminarily to a three-month high in early August amid improved expectations for the economy and personal finances. While Americans are still worried about inflation, positive economic news recently has made them less pessimistic about the outlook than a month ago when the index reached an all-time low.
- The surge in job growth lessens concerns about the economy while also complicating the Federal Reserve’s task to cool it down, making another substantial rate hike likely at its September meeting. According to the CME’s FedWatch tool, markets fully anticipate the Fed will boost the federal funds rate by a half- or three-quarters of a percentage point next month.
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