Market Perspective for August 14, 2022

The stock market had another good week, with the S&P 500 finishing in the green for the fourth consecutive week. The Dow Jones Industrial had a couple of days with gains of over 400 points. On Wednesday, the Dow gained 535.10 points or 1.63 percent. On Friday, the Dow closed higher by 424.38 or 1.27 percent.

Also, on Wednesday, the Nasdaq jumped 2.89 percent, and the S&P 500 rose 2.13 percent to its highest level since May. On Friday, the indexes had similar gains. For the week, the DJIA rose 2.9 percent, the S&P 500 gained 3.3 percent, and the Nasdaq closed higher by 3.1 percent.

Wednesday’s big rally began at the opening bell after the July Consumer Price Index (CPI) came out, showing inflation was lower than anticipated. The July CPI rose 8.5 percent compared to July a year ago. While still not a great number, it was lower than the 9.1 percent number last month and lower than the estimated increase of 8.7 percent.

A drop in gasoline prices is the main reason for the decrease. On a monthly basis, the CPI report showed gasoline fell by 7.7 percent, and energy prices dropping by 4.6 percent. These declines were offset by monthly gains of 1.1 percent in food prices and a 0.5 percent increase in shelter costs.

Taking out the more volatile food and energy prices, the core CPI rose 5.9 percent from prices in July 2021 and an increase of 0.3 percent over last month. Estimates had these figures at 6.1 percent annually and 0.5 percent monthly.

The market rallied on the CPI report as traders believed this could slow the aggressive moves by the Federal Reserve. At the least, it shows that inflation could have already peaked.

Even with the lower-than-expected numbers, inflation is still the main concern on Wall Street. The 12-month increase in food prices of 10.9 percent is the fastest pace since May 1979. Food items showing the largest year-over-year gains are butter up 26.4 percent, coffee up 20 percent, and eggs jumping 38 percent.

Even though the energy index dropped, electricity is up 1.6 percent and an increase of 15.2 percent over last July. The overall energy index is up 32.9 percent from a year ago.

Items that showed a monthly decline were used vehicles down 0.4 percent, apparel down 0.1 percent, transportation down 0.5 percent, and airline fares were down 1.8 percent for the month.

Shelter costs are up 5.7 percent from a year ago and continue to rise. Shelter costs make up about one-third of the Consumer Price Index weighting.

The drop in inflation was good news for workers as their monthly real wages increased 0.5 percent, but when adjusted for inflation are down 3 percent from a year ago. The main reasons for inflation continue to be problems with the supply chain, high demand for goods that are in short supply, and trillions of dollars in monetary stimulus.

Before this recent CPI report, it was expected that the Fed would raise rates 75 basis points for a third consecutive time. But following the report, traders now believe there is a better chance of a smaller 50 basis point rate hike.

Another sign that inflation has already peaked is wholesale prices fell 0.5 percent in July from the previous month for the first time since April 2020. The producer price index gauges the prices received for final demand products. Economists expected an increase of 0.2 percent.

On an annual basis, the PPI rose 9.8 percent, the lowest rate since October 2021. That compares with a record increase of 11.7 percent in March and an increase of 11.3 percent in June.

The second-quarter earnings season is almost complete. Out of the 455 companies listed on the S&P 500 already reporting, about 63 percent have beat revenue forecasts, and 75 percent have topped profit projections. Compared to last year, earnings are forecast to be 8.7 percent higher, with revenue growth projected to be up 14.8 percent.

The upcoming week will have the following economic reports that will tell us how the housing market is doing, which could affect the major market indexes:
• Tuesday: Housing starts
• Wednesday: Federal Reserve minutes from the July 26-27 meeting
• Wednesday: Retail sales
• Thursday: Existing home sales from the National Association of Realtors

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