Wall Street on Friday suffered its worst week since late May, as investors who had driven stocks to record highs faced a reality check in a combination of trade developments, weak economic data, and concerns over the independence of federal organizations.
The roller coaster ride for equities began with the conclusion of the Federal Reserve’s fifth monetary policy committee meeting on Wednesday. The central bank held its key rate steady, and chair Jerome Powell signaled that policymakers were in no hurry to cut interest rates.
On Thursday, stocks took a beating after the release of a hot inflation indicator. The core personal consumption expenditures price index – widely seen as the Fed’s preferred inflation gauge – came in hotter than anticipated on a Y/Y basis for June – the 2.8% reading remains stubbornly higher than the central bank’s desired 2% target.
Then came Friday’s jobs numbers. U.S. job growth in July was much weaker than anticipated, while payrolls for May and June were collectively revised lower by 258K. Quickly, Trump alleged that the jobs data had been “rigged” to make him and the Republican party “look bad”. He also said he would fire Bureau of Labor Statistics head Erika McEntarfer. By the end of the week, Erika was gone.
For the week, the S&P slid 2.4%, while the Nasdaq fell 2.2%. The Dow slumped 2.9%.
Future Wealth’s View
Economic data is telling us, whether Donald Trump wants to believe it or not, that US economic growth slowed through the first half of the year as consumers reduced spending and companies sought to inoculate themselves from the Trump administration’s frequent and unpredictable shifts in trade policy.
Despite months of public pressure, threats and social media attacks from Donald Trump, Federal Reserve Chair Jerome Powell said this week that interest rates are in the right place to manage continued uncertainty around tariffs and inflation. But, the weak jobs data almost forces his hand to cut interest rates in the next meeting. However, the next meeting is not till September. There is no Fed meeting in August.
The main culprit of the slowdown is tariffs. Evidence thus far points that Corporate America is bearing the bulk of tariff costs. Firms are opting to absorb the costs rather than pass them along in an attempt to preserve market share. However, not all of these costs are being borne by corporations. Some of the expense is being pushed out to consumers in the form of higher prices.
But, it is important for investors to keep things in perspective. We are a $30 trillion economy. We import roughly $3 trillion a year. That $3 trillion is subject to tariffs. Some of these costs are absorbed by the manufacturers. Some by corporations and distributors. The rest is passed on to consumers.
We believe that Corporate America and the US consumer are adjusting well to the new reality and the stock market could continue to move higher. But, August tends to be one of the weakest months for stocks. Stay tuned.