Powell corrects the narrative
Groupthink is incredibly powerful. If enough people believe something, will it come true? In the case of equity markets, yes—but only temporarily. For equity investors, the temporary period was mid-July to mid-August when the S&P 500 went up 13% on the misplaced belief that a Fed pivot was forthcoming.
Alas, this was not the case. As close Fed observers, we were perplexed as to how anyone could come to such a conclusion. Yes, inflation may have peaked, and the Fed might not raise rates as fast. However, inflation persistence, not the peak print, will determine where the Fed ultimately takes Fed Funds.
It will take a while for investors to understand that the meaning of “don’t fight the Fed” has changed. Previously, the Fed always had your back. The July to August runup was evidence that many investors still believe this. But the true meaning has switched now that the Fed must fulfill its inflation mandate for the first time in a generation: The Fed no longer has your back (as long as inflation persists).
Equity investors are slowly learning this lesson. After falsely falling into the “groupthink” that a pivot was coming, Jay Powell reminded investors in Jackson Hole that this was not the case. As a result, the S&P 500 fell 8% from the August high and closed down 4.3% for the month of August.
Meanwhile, 10 Year US Treasury yields increased a substantial 54 basis points to 3.2% in August, putting them higher than where they closed out in June. Obviously, the rising rates are having a negative effect on equities. Higher rates mean lower valuations, which began to get out of control in July at 18x+ forward PE (see last month’s letter).
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This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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