The S&P 500 posted its worst weekly performance since mid-June, slumping 4.78% for the five-day session. The losses came on the back of a solid 3.65% gain last week. The selling pressure started on Tuesday after a hotter than anticipated consumer price inflation report, with the headline print for August rising 8.3% from a year ago. The sell-off continued through the rest of the week dashing any possibility of a recovery out of the bear market over the near term.
There were hopes that inflation would come in weaker than expected, meaning the Fed could eventually ease up on its quantitative tightening cycle, but by the way things look now, it may double down on its aggressiveness. Now the question becomes are the markets going to keep making the same inflation assumption mistake or is the Fed going to keep raising rates until they get a CPI number that makes them pause which may be too late to stop a recession?
Future Wealth’s View
The CPI reading destroyed the idea that the Fed will pause anytime soon. We had stated in our article on Aug 21, 2022 – “We are left with three different scenarios for the September Fed meeting. If the inflation reading (CPI) in August drops to 7.8% or below from July reading of 8.5%, there is no compelling reason for the Fed to hike rates beyond 50 bps and Wall Street will celebrate and the bull market will be officially opened. If the reading is above 8.5%, the Fed will be proven right and the recent rally will be marked as a bear market rally that petered out. If the reading is between 7.8% to 8.5%, hold your breath. Anything can happen.”
Well, the number came in at 8.3% and vs. the 8.1% consensus forecast, while core CPI – which strips out volatile food and energy prices – rose more than expected to 6.3%, from 5.9% in July. That is despite gas prices that have come down tremendously over the past 13 weeks, suggesting that price pressures are seeping into more parts of the economy, like housing, college tuition and medical services.
With sticky inflation and consumers still willing to pay as prices rise, we, at Future Wealth LLC, have now come to the conclusion that a recession is simply inevitable. The markets have been too optimistic and wrong and the Fed is no longer forward looking and will be wrong (again) with raising interest rates too much.
And that will be the legacy of Jerome Powell – thank you very much!