Paul Tarins, RICP®,WMCP®,CSRIC™
Up through the final trading days of August, markets had staged an exceptional rally off the June lows, making up nearly half of prior annual losses. The premise was that economic slowing and peak inflation measures would support a more dovish Federal Reserve ahead. The oversold recovery took the S&P 500 index all the way back up to its 200-day moving average. Recall, however, how we previously described the mid-summer recovery as a potentially “self-defeating rally,” given that piercing post-Covid market bubbles has been one of the Fed’s larger successes towards fighting inflation-inducing speculation.
Sure enough, Federal Reserve Chair Powell used his first opportunity at the Jackson Hole Economic Symposium to strongly reiterate the Board of Governors’ steadfast commitment to bringing inflation back down to their 2% target rate (Investopedia, “Powell Tells Jackson Hole Fed’s Overarching Focus Is Reducing Inflation,” 8/26/22). Although inflation is showing signs of peaking, we still have a long way to go to the target level, leading the S&P 500 to give up more than half of its recent recovery gains over just a matter of days.
Global Asset Class Returns August & Year-to-Date 2022
For the month of August, the S&P 500 index (‘SPY’ ETF Proxy) closed -4.1%, reversing earlier gains of similar magnitude. Russell 2000 small-caps fared modestly better -2.0% (‘IWM’), reflecting the breadth that had supported the recovery. Fixed income also fell, with the Bloomberg Aggregate Bond index -3.0% (‘AGG’). Long-dated Treasuries remain the most negative asset class on the year, down -23.6% through August (‘TLT’). This has made for a challenging year for ‘balanced’ portfolios, typically those allocated 60% to stocks and 40% to bonds. Such portfolios are subsequently down in the mid-teens, whether they are US-focused or globally diversified. In contrast, the rising rate and inflationary environment continue to support positive Commodity and US Dollar results.
On the economic front, jobs remain strong with 315,000 nonfarm jobs added last August (CNBC, “Payrolls rose… in August…”, 9/2/22). Atlanta Fed Gross Domestic Product estimates have also recovered from a summer stall line, even as we continue to see mixed tea leaves for future growth among Institute for Supply Management and other economic reports.
Although year-to-date market losses remain well contained and we continue to lean positive for the balance of the year, stocks and bonds both face key technical levels in the days ahead. September is known for its volatility and investors and advisors alike need to be prepared for continued choppiness as markets pave the way into year-end.
Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.