Market Perspective for September 4, 2022

It was another losing week for the stock market as the major indexes fell for a third straight week. The main reason for the down markets is the continuing fears about the Federal Reserve and how many more rate hikes there will be.

For the week, the Dow Jones Industrial Average was down 3.0 percent, the S&P 500 fell 3.3 percent, and the Nasdaq lost 4.2 percent. The stock market averages remain negative for the year, with the Dow down 13.8 percent, the S&P 500 down 17.7 percent and the Nasdaq down 25.7 percent year-to-date.

Friday started higher in the morning but gave up all gains and ended in the red for the day. The Dow Jones Industrial Average erased a 370-point gain in the morning to close the day down 337.98 points or 1.1 percent. The other major market indexes also gave up their gains early in the day, with the S&P 500 losing 1.1 percent and the Nasdaq losing 1.3 percent for the day.

Before the opening bell on Friday, the Labor Department released the jobs report for August, showing a gain of 315,000 new jobs last month, which was in line with expectations that estimated a gain of 318,000 jobs. The unemployment rate ticked up to 3.7 percent from the previous 3.5 percent.

Some traders believe the job market is still too hot, which will keep the Federal Reserve from slowing down its interest rate hikes. Other economists believe this job report was a Goldilocks report, not too hot and not too cold.

The strong labor market has created 3.5 million jobs in 2022, despite being, by some definitions, in a recession. Other economists believe this jobs report all but confirm the Federal Reserve will raise rates another 0.75 percent at their next meeting in September but then slow the hikes over the remainder of the year.

There are four more consumer price index reports (CPI) left in the year, which will be carefully watched for signs that inflation is easing. Traders are looking for any signal that the Fed will slow its rate hikes or even reverse them.

There are signs that inflation has already peaked. Oil and commodity prices have come down from highs earlier this year, and last week the ISM manufacturing prices paid index fell to its lowest levels this year. The ISM manufacturing prices paid index is now in line with pre-pandemic figures.

Wage gains remain steady, and the housing market is starting to cool off. It could take months to see any meaningful signs that inflation moves decisively lower, especially in areas like rent, shelter, and the broader services sector.

New York Federal Reserve President John Williams said Tuesday that he expects the interest rate to stay higher and remain at higher levels until inflation is pushed back and that a restrictive policy is necessary for some time to come.

Williams did not actually say where he wants to see rates eventually but stated he believes reducing inflation is about reducing demand and that he wants to see positive real interest rates.

Real interest rates are the nominal rate minus inflation. Currently, the rate is in the range of 2.25-2.5 percent, which is far below the Fed’s preferred core personal consumption expenditures price index inflation gauge, which was at 4.6 percent in July. As you can see, that is about -2.1 percent real rate, and they want it to be positive.

Cleveland Federal Reserve President Loretta Mester has an even more hawkish attitude saying on Wednesday that she sees interest rates going above 4 percent in the coming months. The market is pricing in a 33 percent chance of rates going to 4 percent.

In August, 20 percent of home sellers dropped their asking price, compared to a year ago when it was at 11 percent. And homes sat on the market an average of five days longer than a year ago, the first annual increase in more than two years.

The supply of homes for sale is also rising, up 27 percent from a year ago. The increase in housing supply is easing some of the anxiety of those looking to buy a home. Mortgage rates on a 30-year fixed mortgage went above 6 percent on Friday to 6.02 percent.

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