The stock market rally that began in mid-June paused last week. Yesterday, the pause seemingly evolved into a reversal of trend as major U.S. stock indexes had their worst day since June. Up until last week, stocks exhibited resiliency in the face of a string of troubling economic news that included flat retail sales, weak housing numbers, an inversion in the yield curve, and tepid economic data out of China.
The Federal Reserve’s hawkish comments about future rate hikes seem to be a driver behind the market’s pause. Minutes from July’s Federal Open Market Committee meeting indicated that additional rate hikes would be needed to help manage inflation. Fed officials did acknowledge that further rate hikes risked unintended economic weakness because of the time it takes for higher rates to work through the economy. The committee indicated that they might slow rate hikes to determine the impact of previous rate increases.
The Fed’s latest economic forecasts projected inflation to decline faster than its June estimate due to a bigger economic slowdown in the year’s second half. However, inflation remains stubborn. Even if the 8.5% annual CPI of July moderates in the upcoming months to mid-single-digits, inflation would still be twice or three times higher than the Fed’s ideal target of 2%.
We’ll continue to stay abreast of economic news and incorporate it into our thinking. Yet as always, your financial goals remain our focus when helping you follow an investment strategy. Please let us know if we can be doing anything for you.