Waiting on Powell

 

By Nicholas Jasinski  |  Tuesday, August 23

Waiting Game. The S&P 500 followed up its worst day in two months with a third-straight loss, but of much more modest scale. The index slipped 0.2% today after losing 2.1% on Monday.

The Dow Jones Industrial Average lost 0.6% today, while the Nasdaq Composite closed essentially flat. The tech-heavy index was down 4.5% over the prior two trading days.

Markets have been predominantly driven by macro factors this year, including changes in interest rates, commodity prices, and expectations of economic growth. For the first half of 2022, those were almost uniformly negative for stock and bond prices. 

Since mid-June, however, a growing number of investors have seen the worst on all of those fronts beginning to enter the rearview mirror. The labor market remains strong, supporting consumer spending and possibly the broader economy. Annual inflation remains elevated but the pace of price increases has decelerated.

That had led to the conclusion that perhaps the Federal Reserve won't need to raise interest rates as high or as quickly in its fight against inflation, and that the U.S. economy was on stronger footing to withstand those rate increases. That relative improvement in the outlook boosted stocks and weighed on bond yields, which decline as the price of a bond increases. Thin summer trading volume may have helped to magnify the scale of the rally.

That has been the market's view, but there are plenty of lingering questions and concerns about how the officials at the Fed feel about the whole thing. Minutes from the central bank's rate-setting committee's July meeting and several speeches by Fed officials in recent weeks haven't been quite as dovish.

So all eyes will be on Friday morning's Jackson Hole Economic Symposium remarks from Jerome Powell, who sits in the chairman's seat and is generally seen on Wall Street as speaking for the committee as a whole. His words and tone carry extra weight, and could do a lot to shape perceptions of the Fed's next moves—depending on how loquacious or not the chairman decides to be.

The waiting game has injected plenty of volatility into the market, and reversed a chunk of the past eight weeks' moves. Stocks have dropped, led lower by riskier companies and industries. Bond yields have declined, and futures markets have priced in a higher fed-funds rate this year and next—no longer are traders betting on a Fed reversal to cutting rates early next year.

The next Fed meeting is from Sept. 20-21. Friday's Powell speech will be among the biggest insights into officials' thinking before their next policy decision. And during a slow, late-summer week with few earnings reports or major economic-data releases, that feels like all investors can focus on.

DJIA: -0.47% to 32,909.59
S&P 500: -0.22% to 4,128.73
Nasdaq: -0.002% to 12,381.30

The Hot Stock: Halliburton +7%
The Biggest Loser: Twitter -7.3%  

Best Sector: Energy +3.6%
Worst Sector: Real Estate -1.5%